Page 43 - Banking Finance AUGUST 2015
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4 Depositors do not get rightful returns and many times designating Assets Reconstruction Companies (ARC)
may lose uninsured deposits. Banks may begin charging resolution agents of banks.
higher interest rates on some products to compensate
Non-performing loan losses iii. Directing the state-level bankers' committees to be
proactive in resolving issues with the state
4 Bank shareholders are adversely affected because EPS governments.
and DPS may come down.
iv. Sanction of fresh loans on the basis of information
4 Bad loans imply redirecting of funds from good projects sharing amongst banks.
to bad ones. Hence, the economy suffers due to loss of
good projects and failure of bad investments v. Conducting sector/activity-wise analysis of NPAs.
4 When bank do not get loan repayment or interest vi. Close watch on NPAs by picking up early warning signals
payments, liquidity problems may ensue. and ensuring timely corrective steps by banks including
early detection of sign of distress, amendments in
4 Decreasing the profitability of the banks. recovery laws and strengthening of credit appraisal and
post credit monitoring.
4 It reduces capital assets and lending limits.
(b) RBI's Guidelines:-
4 They decrease the market capital of the banks
The RBI's recently released study 'Early Recognition of
4 They bring unwanted attention from government Financial Distress, Prompt Steps for resolution and Fair
regulators. Recovery for Lenders: Framework for Revitalizing Distressed
Assets in the Economy' has suggested various steps for
Management of NPAs quicker recognition and resolution of stressed assets. Banks
will now be required to classify Special Mention Accounts
NPAs can be manage by policy reforms and by MRS therapy. (SMA) into three sub-categories:
Both actions can be applied as follows - 1. SMA-0: Principal or interest not overdue but showing
Management by Policy Reforms- incipient signs of stress
Asset quality in the banking system has deteriorated in 2. SMA-1: Principal or interest overdue by 31-60 days
the post crisis years and among banks groups, PSBs had
the highest level of stress in terms of NPAs and 3. SMA-2: Principal or interest overdue by 61-90 days
restructured advances. The RBI in its Financial Stability
Report, December 2013 has identified five sectors - The other main proposals in the framework are:
infrastructure, iron and steel, textiles, aviation, and
mining - as the stressed sectors. PSBs have high exposures 1. Centralized reporting and dissemination of information
to the 'industry' sector in general and to such 'stressed' on large credit.
sectors in particular. Increase in NPAs of banks is mainly
accounted for by switchover to system based identification 2. Early formation of a lenders' committee with timelines
of NPAs by PSBs and slowdown of economic during good to agree to a plan for resolution.
times.
3. Incentives for lenders to agree collectively and quickly
Steps of the government for Improving assets to plan. There is better regulatory treatment of stressed
quality:- assets if a resolution plan is underway, or accelerated
(a) Policy Initiatives:- provisioning if no agreement can be reached.
Some recent initiatives taken by the government to address 4. Improvement in current restructuring process:
the rising NPAs include: Independent evaluation of large value restructurings
i. Appointment of nodal officers in banks for recovery at is mandated, with a focus on viable plans and a fair
sharing of losses (and future possible upside) between
their head offices/zonal offices/for each Debts Recovery promoters and creditors.
Tribunal (DRT).
5. More expensive future borrowing for borrowers who
ii. Thrust on recovery of loss assets by banks and do not cooperate with lenders in resolution.
6. More liberal regulatory treatment of assets sales:
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