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    RBI, government do heavy lifting; can banks get back in shape?

    Synopsis

    The government has been continuously raising the bar by introducing structural economic reforms.

    ET CONTRIBUTORS
    By DK Aggarwal

    Toxic loans have choked Indian banking and financial services and now, both the government and the Reserve Bank of India are on the same page on the NPA resolution and improving the overall discipline in the manner the business is carried out in India.

    The government has been continuously raising the bar by introducing structural economic reforms. Demonetisation, the Goods and Services Tax and amendments to the Insolvency and Bankruptcy Code (IBC) are just to name a few.

    The government has brought in the IBC and the non-performing asset (NPA) resolution framework to deal with the mountain of bad loans of PSU banks. The stressed assets had surged in the past few years, and the NPA load is currently estimated at over Rs 10 trillion. These loans are mostly from infrastructure sectors such as power, telecom, roads and ports.

    In order to speed up resolution of the problem at Indian banks, the RBI has recently tightened its rules around loan defaults, seeking to push larger defaulters toward bankruptcy courts. It has also withdrawn the existing special schemes such as 'Scheme for Sustainable Structuring of Stressed Assets' (S4A), strategic debt restructuring and even the much-maligned corporate debt restructuring.

    As per the new guidelines, the central bank has focused on early identification of stressed assets rather than early resolution. It has now classified stressed asset as SMA (Special Mentioned Accounts) on a daily basis. Moreover, under this set-up, a bank has to report stressed assets on a weekly basis to the Credit Repository of Information on Large Credits (CRILC) and start on a resolution plan immediately. And this resolution plan can be lowering the interest rate, converting part of the loan into equity and extending the loan period. It has been made clear that lenders now must implement a resolution plan within 180 days for accounts of at least Rs 2,000 crore, starting March 1.

    To address the NPA issue and give strength to the sector, the government earlier announced recapitalisation of public sector banks by infusing around Rs 2.11 lakh crore, including pumping in Rs 1.35 lakh crore through recapitalisation bonds.

    Out of the 21 public lenders in question, 11 are under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework. Actually, these 11 banks have high levels of stressed assets and have suffered from consecutive years of losses. Banks that are corporate centric have taken a hit in their valuations.

    To conclude, undoubtedly, the RBI has offered full freedom to lenders to restructure accounts, but warns of whacking lenders if they fail to meet the prescribed timelines. The central bank may also subject them to potential monetary penalties and other actions. However, this change may see some initial hiccups, but will remain smooth, given the consolidated structure in place.

    Moreover, defaulter companies will try to defend their assets by bringing in the amount and safeguarding their portfolio from any IBC reference. The steps taken by the central bank and the government are expected to be positive for the sector, going forward, as it will lead to cleaner bank balancesheets, improvement in asset quality, more transparency and higher lending.




    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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