Chasing Bank NPAs

How the RBI has taken two important steps to rescue the banks

In the last couple of months, the RBI has initiated two very important measures that will go a long way in alleviating the problem of NPAs in the banking system. At over $110 billion of NPAs and nearly $180 billion of stressed assets, this was a massive problem. In fact, the entire bank credit by the PSU banks has stagnated due this mountain of NPAs. So how exactly is the RBI tackling this problem?

Prompt Corrective Action (PCA)… 

Prompt corrective action is a initiative that the RBI will drive specifically for banks where the financials are seriously imperiled. Here are some criteria under the PCA. A bank will be referred to the PCA if its net NPAs cross a certain threshold level or if the Return on Assets is negative for two years in succession. For example, the RBI first initiated PCA in case of IDBI Bank and then followed it up by initiating PCA for Central Bank of India. In both the cases the net NPAs were in excess of 10% and the ROA was negative for 2 years in succession.

Initiating PCA will mean the RBI regulates most of the activities of the bank from credit monitoring, credit assessment and investments. RBI will also place restrictions on staffing, senior management compensation and branch expansion plans. The idea is to enforce a high level of discipline so that weak banks have a chance of bouncing back.

Referring to IBC… 

This is, perhaps, the most aggressive stand taken by the RBI with respect to addressing the NPAs in the banking system. While PCA attacks the NPA problem from the perspective of the bank, the IBC attacks the NPA problem from the perspective of the defaulting clients. The RBI has identified 12 such defaulting companies where the bank exposure exceeds Rs.5000 crore and where more than 60% of the loans have become NPAs. Companies identified in the first round include names like Bhushan Steel, Bhushan Power, Alok Textiles, Amtek Auto, Electrosteel Castings, Essar Steel. The lending banks will be given 180 days time to come up with a resolution to the loan problem, which may be subsequently extended up to a maximum of 270 days. On the completion of the 270 days, the RBI will automatically initiate proceedings against the defaulting company under the Insolvency and Bankruptcy Code (IBC). This will entail either a complete sale of the company, stripped sale or a large haircut.

The PCA and the IBC are major initiatives from the RBI. Of course, there are still question marks over the legal implications and the implementation of these measures. But, to the credit of the RBI, a major step has been taken. If the RBI makes headway, then we may hope to see the beginning of the end of the NPA problem of Indian PSU banks! ©

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