 "Parliament")
"Not happy" with handling of bad loans by RBI and banks, a Parliamentary panel said Wednesday that NPAs raise serious questions about credibility of the mechanism to deal with the issue that is threatening the stability of banking system.
It also said the Reserve Bank hasn't "quite succeeded" in enforcing its rules on bad loans as it should not be a passive regulator but exercise powers of punitive action against banks in case of defaults.
As of September 2015, the net Non Performing Assets of public sector banks stood at Rs 2,05,024 crore, while the Gross NPAs were at Rs 3,69,990 crore.
"Such high incidence of NPAs obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans as such, even as certain estimates indicate that gross NPAs may touch Rs 4 lakh crore by the end of this fiscal year," said the report of Standing Committee on Finance tabled in Parliament.
The Committee noted with "deep concern" that in spite of various measures taken by the Government and Reserve Bank of India (RBI) from time to time, "the NPA problem confronting the financial sector and threatening the stability of the banking system seems far from over".
It said that bank balance sheets continue to remain under pressure and recent quarterly results of banks are a "grim reminder" of the situation that banks find themselves in, with most of them reporting sharp dip in profits, with NPAs and provision for write offs ballooning.
"On the one hand, the country's economy is growing fast and competing with economic superpowers and on the other hand, the rising trend of NPAs has the potential to damage this growth story," it said.
The panel headed by senior Congress leader M Veerappa Moily said: "The Committee are thus not happy with the management of the problem, on both fronts viz at the level of the RBI and at the level of the banks. The banks have evidently failed to notice the early signs of stress on the loans disbursed by them".
The report said the Committee are "constrained" to observe that the "RBI does not seem to have quite succeeded, as a regulator", in so far as implementation and enforcement in letter and spirit of its own guidelines, on stressed loans is concerned.
"Mere issuing of guidelines by RBI does not seem to have yielded the desired results... As the Committee would not like the RBI to be a passive regulator, when major lapses occur in banks, it would be in the fitness of things if RBI exercises its regulatory powers vis-a-vis banks to take punitive action in cases of default and to enforce their guidelines," it said.
It also said RBI as a regulator should have its regulatory role well delineated and thus not have its Director in the Board(s) of the banks as part of their management, "as conflict of interest may lead to avoidable laxity".\
The panel of Lok Sabha and Rajya Sabha, which also includes Former Prime Minister Manmohan Singh as one of the 31 members, said that early and timely intervention as well as consequential remedial measures are necessary to stem the rising trend of NPAs.
The stressed assets ratio for the system as a whole exceeded 11 per cent at the end March, 2015 compared to 10 per cent in March last year.
"This figure is expected to be even higher this fiscal, as there is apprehension that the number of failures of restructured advances would increase," it said.
As of September 2015, the panel said, "it is alarming" that nearly Rs 6.8 lakh crore worth of bank loans were in the stressed category, compared with Rs 5.91 lakh crore last year.
The panel recommended that specially empowered Committees at all the three levels - RBI, Banks and the borrower - should be set up to continually monitor the status/progress of large loan portfolios.
"Accountability of nominee Directors of RBI/Ministry on the Bank Boards as well as the CMDs/MDs of banks should also be fixed in the matter," it said.
In view of the "fact" that diversion of funds by promoters to unrelated businesses and poor pre-sanction due diligence have been cited as key reasons for bank loans turning toxic, the panel opined that forensic audit should be made mandatory for specific class of borrowers.
The extent and the quality of the equity that the promoters are capable of infusing into a project, therefore, "also needs" to be factored in by a lender bank.
It also made a case for developing and strengthening a vibrant bond market to finance infrastructure projects.
It asked the government to make structural changes including revival of Development Financial Institutions (DFI) for long-term finance and allowing Infrastructure Finance Companies (IFCs) to purchase infrastructure projects turning into NPAs.
Companies, which have undergone restructuring process for their stressed loans, should be made public, there cannot be any justification for maintaining secrecy on this count, the report said.
Considering the "non-efficacy" of the CDR mechanism, it said the RBI's scheme for Strategic Debt Restructuring (SDR), which empowers banks to take control of defaulting entity and its assets by converting loan into equity, may armour the banks with an additional tool to cope with their NPAs.
A change in management must be made mandatory in such cases involving wilful default or sheer inability on the part of the promoters, where they have diverted funds and no redemption is possible, it added.
The panel said it would like to put a "caveat" that the SDR mechanism should be used sparingly so that it does not become a smoke screen for large scale write-offs. It is necessary that even after SDR, the penal consequences for a willful defaulter should continue to operate".
