{"id":36349,"date":"2018-11-02T12:28:40","date_gmt":"2018-11-02T06:58:40","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=36349"},"modified":"2018-11-02T12:28:40","modified_gmt":"2018-11-02T06:58:40","slug":"npa-resolution-a-rough-road-ahead","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/npa-resolution-a-rough-road-ahead\/","title":{"rendered":"NPA resolution: a rough road ahead:\u00a0"},"content":{"rendered":"<p><strong><a href=\"http:\/\/www.livemint.com\/Opinion\/3apxaOdL0dSNLLXWMHI5lO\/NPA-resolution-a-rough-road-ahead.html\">NPA resolution: a rough road ahead<\/a>:\u00a0<\/strong><\/p>\n<hr \/>\n<p><b>Context<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impact the entire banking system<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">And banking clean-up plus corporate deleveraging are critical for a more robust economic revival<\/span><\/li>\n<\/ul>\n<p><b>The Worrying Factor<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The latest \u201cFinancial Stability Report\u201d, released by the Reserve Bank of India (RBI) states that conditions in the Indian financial system are expected to deteriorate further before they improve.<\/span><\/li>\n<\/ul>\n<p><b>Indicators of Worsening Situation<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">Gross non-performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">Stress tests conducted by the Indian central bank indicate that this number could rise to 10.2% under the baseline scenario<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The indicator of banking stability worsened over the second half of fiscal year 2017\u2014with measures of asset quality and profitability providing the most cause for concern<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">There has been a modest improvement in capital adequacy but this was brought in by the private sector and foreign banks.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The situation in public sector banks is especially worrisome. Capital adequacy is under strain.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">Return on assets is negative. So is return on equity.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">More than a quarter of the loans given by public sector banks to industry (thus excluding loans to agriculture, services and retail consumers) are under stress.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">In a nutshell, it can be said that government banks are at the epicentre of the larger banking mess.<\/span><\/li>\n<\/ul>\n<p><b>Implications of \u201cFinancial Stability Report\u201d<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Fifty-six per cent of the loans given out by Indian banks have gone to large borrowers\u2014but they account for a massive 86% of gross NPAs<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">In that sense, the new strategy of focusing on large defaulters makes good strategic sense.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">Bad loans are concentrated in a few firms in a few sectors such as telecommunications, power, infrastructure and steel.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">All this is a good backdrop at a time when the NPA resolution process has reached a critical stage.<\/span><\/li>\n<\/ul>\n<p><b>Way Forward<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The financial authorities are focusing on a few large problem accounts that are weighing down the Indian banking system.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The RBI has already identified 12 big accounts for quick resolution, under the powers given to it by the recent presidential ordinance<\/span><\/li>\n<li><span style=\"font-weight: 400;\">These 12 accounts are the source of a full quarter of the total NPAs of the banking system.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Lenders have been instructed by their regulator to use the provisions of the new Insolvency and Bankruptcy Code to file insolvency proceedings against companies. Lenders have approached the National Company Law Tribunal in at least two of the 12 accounts identified by the RBI.<\/span><\/li>\n<\/ul>\n<p><b>Future Prospects<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">The current situation has lead to a track where for the first time, in recent Indian financial history; powerful firms are living under the threat of liquidation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The new bankruptcy law allows defaulters 270 days to come up with a credible plan to repay loans\u2014and lenders can initiate liquidation if companies fail to do so.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">In other words, the design of the bankruptcy code, does not allow the companies to manipulate<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Any banking clean-up will eventually require capital\u2014lots of capital. it will need external equity capital of unto Rs95,000 crore, far higher than what the government has budgeted as capital infusion for all the banks it owns. So any move made towards dodging the situation will come under the radar of scrutiny.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">It is also being expected that the Indian investment cycle will improve<\/span><\/li>\n<\/ul>\n<p><b>Conclusion<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">It is well known that the economic recovery cannot build momentum unless private sector investment revives.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0\u00a0<\/span><span style=\"font-weight: 400;\">Such a revival will be very difficult unless the twin balance-sheet problem\u2014over-leveraged corporations and undercapitalized banks\u2014is solved credibly.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">The recent move to take large defaulters towards insolvency proceedings shows that some firm action is finally being taken and it definitely shows some hope.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>NPA resolution: a rough road ahead:\u00a0 Context The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impact the entire banking system \u00a0\u00a0And banking clean-up plus corporate deleveraging are critical for a more robust economic revival The Worrying Factor \u00a0The latest \u201cFinancial Stability Report\u201d,&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/npa-resolution-a-rough-road-ahead\/\">Continue reading <span class=\"screen-reader-text\">NPA resolution: a rough road ahead:\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-36349","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704895268},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/36349","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=36349"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/36349\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=36349"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=36349"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=36349"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}