DNA Edit: Tough stand on NPAs

The Cabinet approval for a proposal to tackle bad loans by amending Section 35 A of the Banking Regulation Act through the ordinance route will give the Reserve Bank of India and public sector banks greater discretion in dealing with big loan defaulters. The criticism of the existing regime was that bankers were loathe to take action on stressed assets for fear of inviting disciplinary action or criminal investigations. The need for an RBI-mediated effort to monitor non-performing assets (NPA) of public sector banks has been felt after the mushrooming of stressed companies whose operating profits (earnings before interest and taxes) were lower than the interest that they needed to pay on their outstanding debt.

Of course, there are cases where the banks improvised. Learning from the bitter example of the Vijay Mallya-owned Kingfisher Airlines, where the entire fleet was grounded and rendered unproductive, the banks forced the stressed Kalanidhi Maran, Spice Jet promoter, to sell his stake in the airlines to Ajay Singh. This action rescued the airlines from a premature death and the banks from another NPA scenario. However, rather than ad hoc measures it is better to institute a framework and protocols to deal with bad loans before the asset quality degrades. The proposed ordinance will give the RBI the power to set up oversight committees to monitor bad loans and give directions to recover assets from defaulters and recast the loans.

As of September 30, 2016, the gross non-performing assets ratio of banks stood at around 12 per cent or Rs 12 out of every Rs 100 loaned by the banks were being defaulted. By December 2016, the gross NPAs of banks had increased to Rs 6.06 lakh crore, up from Rs 5.02 lakh crore in May 2016. By March 31, 2016, the total corporate bad loans of public sector banks had stood at Rs 3.36 lakh crore, which was nearly two-third of the total bad loans and 12 per cent of the total loans given to corporates. The perception had grown that the RBI and the central government was not sincere on bringing wilful defaulters to book. There have also been reports of wilful defaulters becoming eligible for fresh loans despite being blacklisted. In this context, the proposed ordinance is a timely clarification from the government that it would take a tough line against wilful default. It remains to be seen if a possible follow-up to the ordinance would be the creation of a “Bad Bank” or a Public Sector Asset Rehabilitation Agency to help banks make the most of bad loans.