Non-Performing Assets (NPAs) have become huge menace for the Indian banking system. To address this issue, the Confederation of Indian Industry (CII) has recommended a five point agenda to the Finance Ministry and the Reserve Bank of India (RBI).
The plan focuses upon, revamping the corporate debt restructuring (CDR) mechanism, creating a special resolution mechanism for the infrastructure sector, setting up of a national asset management company, liberalising norms to increase capitalisation of asset reconstruction companies, and improving the effectiveness of the insolvency regime and implementation of legal framework.
Citing rapid upsurge in NPAs and restructured loan accounts as one of the biggest challenges for the Indian banking system, CII said stressed loans in India, those categorised as bad and restructured, crossed 10 % of all loans in mid financial year 2013-14 are expected touch 15% mark by the end of FY 2014-15.
According to CII, there is a need to revamp the CDR mechanism by addressing deficiencies in the present system through realignment of the legal system to make remedies available for the creditor as well as phasing out of curbs on asset classification and provisioning, enhancing project appraisal standards, increasing accountability of the promoters during the restructuring process, time-bound assessment and approval of restructuring proposal.
Second, a special resolution mechanism should be created for banks to deal with stress in infrastructure sector through setting up a special purpose infrastructure fund and/or development financial institution (DFI), which would lend to projects that require last-mile funding and are classified as stressed assets.
Third, the government and the RBI should facilitate the formation of NAMCO with banks as its major and initial shareholders with an equity base of around Rs.5-6 thousand crore. Fourth, issue of shortage of capital for the Asset Reconstruction Companies (ARCs) need to be addressed. Given the large scale sale of bad loans, last year, the government allowed foreign investors to buy up to 100% equity in ARCs; but RBI rules stipulate that a single entity cannot hold more than 49% stake.
CII has recommended that the RBI make it easier for ARCs to raise capital in its final guidelines on ARCs by relaxing restrictions on the equity that a single entity can hold in them and allow banks to loan money to them against future receivables. Finally, there is a scope to improve the effectiveness of the insolvency regime and asset resolution mechanism.
The steep economic downturn, with GDP growth declining from close to 9% to below 5% over the last couple of years, accompanied by high interest rates has led to a sharp deterioration in asset quality for the banking sector."Owing to their impaired portfolios, the banks are hesitant to extend credit and this affects growth in the corporate sector," said Chandrajit Banerjee, director general, CII. "Today, amidst decelerating economic growth, an increasing number of borrowers are struggling to repay loans as persistently high inflation and interest rates impact demand and reduce their pricing power. High leverage in corporate sector and a large interest burden could keep stress levels in bank asset portfolios elevated. Further, the unexpected depreciation of the Indian rupee during the last year amplified the problem for companies with significant foreign currency borrowings," he added.
What is needed is better coordination between the different forums that deal with insolvencies to complete restructuring or closure of a business in a defined timeframe.