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Modi government comes to RBI, banking sector's rescue with ordinance
BT Online
Friday, May 5, 2017 | 14:14 IST
Modi government comes to RBI, banking sector's rescue with ordinance

The government on Friday tweaked rules to help tackle the record $150-bn  troubled debt accumulated in the nation's banks.

The government may authorize the Reserve Bank of India to direct banks to initiate an insolvency resolution process in the case of a default under provisions of the bankruptcy code, the government said, in an ordinance published on Friday that alters the country's Banking Regulation Act.

The ordinance, which goes into effect immediately, also said the RBI may specify one or more authorities, or panels to advise banks on resolution of stressed assets.

Toxic loans of public sector banks (PSBs) rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, road infrastructure and textile sectors.

Gross NPA pf PSBs nearly doubled to Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015.

The proposed amendment approved yesterday in banking laws will empower the Reserve Bank to effectively deal with the problem of mounting bad loans in the banking sector.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans to asset reconstruction companies for fear of being hauled up by investigation agencies. Once the law is amended, RBI will be able to give specific solutions for specific cases and also, if required, look at providing relaxation in terms of current guidelines, said a senior government official aware of the deliberations.

A Global Financial Stability Report released by the International Monetary Fund (IMF) pointed out that Indian banking sector comes out as worse-off compared to other emerging economies in terms of little bank capital that it has set aside to provision for losses on its assets.
 
Undoubtedly, India's Rs 75 lakh crore banking system is grappling with serious problems and the situation appears to be spinning out of control. The gross NPAs have jumped from a low of 2.5 per cent in 2011/12 to a high of 10 per cent in 2016/17.
 
Stressed loans, which include gross NPAs plus the restructured loans under various resolution schemes, is estimated to be anywhere between 18-20 per cent.
 
Experts put the stressed loan figure conservatively at around Rs 14 lakh crore. They warn that the country's bad loan situation could choke its growth because banks are the only major source of funding for private investment.

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