India taking banking NPAs head on

Written by Ketan Warikoo || March 07 2016

NPAs (non-performing assets) as a percentage of total banking credit in the Indian banking industry has increased to nearly 5% in 2015. This has essentially come from the public sector (state owned) banks (PSBs). 90% of the NPAs in the Indian banking industry are attributable to these banks.

Interestingly, at a time when India needs to free up capital to help corporations grow aggressively in the domestic (several licenses are also coming up for bidding) and international markets (inorganically here) the central bank, The Reserve Bank of India (RBI), has thought otherwise and is pushing for greater fiscal prudence. The RBI has given a deadline of March 2017 for all banks to clean up their balance sheets, which also requires these lenders to set aside huge chunk of capital in the form of provisions. The central bank wants the banks to deal with the NPA problem immediately, instead of postponing and worsening it. A number of measures have been announced by the Finance ministry and the RBI intending to make this a watershed year for bringing much needed breather to the banking industry in the country. These include:

  1. Recapitalization of PSBs to the tune of Rs. 25,000 Crores this fiscal year. The Finance Minister has also promised additional funding of Rs. 20,000 Crores for state owned banks in the following two fiscal years.
  2. Formation of a Banks Board Bureau headed by former CAG (Comptroller and Auditor General) of India Mr. Vinod Rai with the mandate to help state run banks recover bad loans besides finding suitable candidates for top jobs at state owned banks.
  3. To help banks and financial institutions (FI) address the problem of huge bad loans, the FY’17 Budget has proposed 100 per cent FDI in ARCs through automatic route. ARCs play a crucial role in resolution of non-performing assets by acquiring them from banks and FIs. The FY’17 Budget also proposed that foreign portfolio investors will be allowed up to 100 per cent of each tranche in securities receipts issued by ARCs subject to sectoral caps.
  4. Passing the Banking and Insolvency Code to aid the Banks recover bad loans in this fiscal. Strengthening of the SAFRESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) and DRT (Debt Recovery Tribunals) Acts.
  5. To introduce ESOPs for public sector bank employees to enhance ownership and engagement.

These together with a slew of measures aimed at internal controls and discipline together with a proposal to look at bank consolidation are on the cards to help bring the public sector banks into health.

Source: Firstpost