The government needs to be commended for finding a mechanism to tame the NPA or bad loan monster, which has pushed the public sector banks into a corner.
By empowering the Reserve Bank of India, the central bank is yet again called to do some heavy lifting to tide over the current non-performing assets (NPA) mess.
But it is still early days to judge whether empowering the RBI to give directions to banks on initiating insolvency resolution process will give the desired results. The commercial banks, it is expected, would continue to hold sway over initiation of other resolution processes.
Critics, however, point out that the main concern of the public sector banks, as regards the 3C sword – CVC, CBI, CAG – hanging over their heads, has still not been squarely addressed.
It is just that a new route has been opened up whereby the primary decision to initiate insolvency resolution process on specific accounts will be with the RBI and not banks. To that extent, decision-making would be facilitated and things would move forward.
The ordinance will also be handy for banks, as it now provides a legal basis for setting up of oversight committees.
It would now be interesting to see whether the advice of these oversight committees would be binding on banks, especially the ones in the private sector. The ordinance for now is silent on this issue.
However, for purists, this ordinance has come as rude shock, given that the RBI is now being empowered to give account specific directions.
Is it the job of a banking regulator to give account-specific directions? Won’t this be tantamount to micromanagement? Will this not lead to interference with the working of the banks?
These are some of the questions doing the rounds in the banking industry circles since Friday, when the ordinance became public.
An interesting dimension is that the government has through the RBI empowerment route got a way to issue directions to private sector banks too.
Private banks, especially the ones with majority foreign ownership, were hitherto guided only by their own board’s decisions on when to initiate recovery actions and what route to adopt. They may now baulk at the prospect of following RBI diktat on initiation of insolvency resolution process.
The Department of Financial Services – not being a shareholder – cannot directly write to private sector banks on their stress assets management strategy. Now, the RBI can issue account-specific directions on the initiation of insolvency resolution process. The moot question is whether the private banks will fall in line.
With the stressed assets problem being acute, the Centre had to look for an urgent solution. Only time will tell if this ordinance move would bring the desired results.