The Ordinance to amend the Banking Regulations Act 1949, which was cleared by the Cabinet on 03rd May obtained presidential asset on May 05th. With the approval of the Ordinance, the Banking Regulations Ac t virtually confers unlimited powers on the Reserve Bank of India (RBI) to deal with NPAs. While the fine print of the completed ordinance is still awaited; and that will give a lot more clarity, the broad contours are already out…
Key highlights of the NPA Resolution Ordinance…
What does this ordinance mean for banks?
From the bank’s perspective there will be quite a few positives. In fact, the cabinet estimates that at least half of the problem cases pertaining to stressed assets will be resolved in the next 1 year. Of course, the RBI only needs to focus on the top-50 stressed accounts and the problem will be predominantly taken care of. The big advantage of this Ordinance is that it provides an institutional framework. Today, any decision on negotiation with borrowers or offering haircuts or even selling to ARCs is the decision of individuals. This is a major bottleneck as bankers are wary that any decision taken, despite the best intentions, may backfire and result in subsequent investigations by the ED and Vigilance departments. This has forced many bankers to play it safe and let the problem fester. By providing an institutional mechanism, the problem of the unwillingness of individual bankers to take the risk is largely obviated. To that extent this will be positive for the stressed banks as it will provide an early resolution to the stressed asset problem and also facilitate unlocking of billions of dollars that are stuck up in such stressed assets.
But, there is the risk of moral hazard in this ordinance…
Some senior banking analysts have pointed out that there is the risk of moral hazard in allowing banks to outsource the more difficult decisions to the RBI. It will create a moral hazard because prudent bankers may not be too inclined to worry about the recovery aspect as there is anyways an institutional mechanism to take care of that. This may either force banks to get overly aggressive on lending targets or become less prudent in lending practices.
Finally, the big challenge in the entire dispute resolution will be finding buyers. It is one thing to find buyers when there is that odd asset up for sale. But it will be a different problem altogether when there is a glut of assets available for sale. That could depress prices and add further to the stress on bank balance sheets. Despite these innate challenges, the ordinance is a good starting point for resolving the burgeoning crisis of stressed assets. While the fine print is still awaited, the good news is that a start has been made in the right direction!
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