The Narendra Modi government’s new policy to deal with non-performing assets (NPAs) is likely to be centred around consortia of banks. It is planning a framework which will enable a consortium to deal more effectively with NPAs.
For this, the new policy would possibly tweak the current guidelines and reduce the threshold in terms of exposure as well as the number of banks within a joint lending forum (JLF) for taking a decision on NPAs.
According to the current rules, decisions regarding a bad loan or toxic assets are binding on all lenders in a JLF if they are approved by 75 per cent in terms of exposure or 60 per cent in terms of absolute numbers. However, these thresholds are being seen as too high and hence there could be a change in regulations to enable JLFs to decide on NPAs based on a simple majority.
Additionally, to empower bankers in state-owned banks even further, the Centre may finally bring in long-anticipated amendments to the Prevention of Corruption Act (PCA) in the Monsoon Session of Parliament, Business Standard has learnt. These measures are a part of a comprehensive policy on NPAs that the government is planning, as dealing with Rs 6 lakh crore worth of toxic assets, which have crippled lending activity and prevented infrastructure growth, is the Modi administration’s priority.
Senior government sources said that while the current laws and frameworks have armed the banks and the Reserve Bank of India with enough teeth to deal with bad loans, banks which are a part of a consortium face problems due to disagreements among them on projects gone bad.
To address that issue, the Centre is expected to bring an enabling provision under which, once a simple majority of the banks, based on their exposure to the bad loan, takes a decision, it will be binding on other banks, who are part of the group.The new exposure level to be set is likely to be lower than the current 75 per cent.
“Dealing with such a situation will require an enabling framework. There have been discussions on the matter,” said a top government official. “By and large, the effort is to find viable solutions. Within the existing framework and dispensation, most of the NPA issues can be resolved,” the person added. It gets difficult with consortium of banks, he pointed out.
According to the Centre’s new policy to deal with NPAs, the focus will be on the top 35-40 NPA cases which will be dealt with on a case to case basis and which comprise nearly 60 per cent of all toxic assets in the Indian banking system, a second official said. “There is no need for big announcements like bad banks. The NPAs can be dealt with based on current regulations. Just some minor changes will be required which will empower RBI and bankers more,” the second official said.
One of the ways to enable bankers to take decisions regarding haircuts on various stuck projects will require amendments to the PCA which will differentiate between decisions taken with mala-fide intent and those taken from a professional perspective. The first official quoted above said that the amendments could come in the Monsoon Session. “Amendments to PCA have been on the anvil. We can expect that soon,” the official said.
The issue of bringing in PCA amendments as soon as possible so that commercially viable decisions by banks are not scrutinised by probing agencies was also discussed at a meeting of Consultative Committee on Finance last month. It was chaired by Finance Minister Arun Jaitley. The FM had then said that the Centre would consider setting up multiple oversight committees under the Reserve Bank of India to examine the cases of non-performing assets referred by banks. This is something that the banks have asked for.
Banks have sought changes in existing debt recast norms including spreading provisioning of large accounts for eight quarters and not seeking personal guarantees from existing promoters. Banks have asked that guarantee should be sought only when there is a management change or a new promoter is taking over the debt-ridden company. This has become necessary as many promoters have refused to give their personal guarantee on loan restructuring, blaming the change in policies, cancellations of mines/spectrum by the courts for their companies becoming non-performing assets.
On provisioning, banks say as large borrowers’ accounts involve large provisioning requirements, a time period of eight quarters should be given to spread the provisioning. At present, the entire provisioning has to be made upfront.
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