Non-Performing Assets(3):Mechanisms and the Way Ahead

In this article, we will be covering the mechanisms in place to deal with the NPA menace and also the steps so required to deal with this enhancing problem in an interlinked manner.

  • Insolvency and Bankruptcy code:
    • This was recently manifested with the passage of Insolvency and Bankruptcy code, 2016.
    • Such mechanism is needed in order to fastrack the resolution process of bankrupt companies and to facilitate faster exits ensuring lesser losses to the companies while also facilitating NPAs recovery for the banks(NPAs will be recovered as resolution involves valuation and selling the assets of companies to recover loans).
    • Till now, it takes a long time, maybe, as long as 6-8 years in the resolution process.
    • The new act introduced will also account for the inclusion of insolvency professionals for greater legitimacy and transparency in the procedure.
  • Debt restructuring:
    • The key mechanism in place is – Strategic debt restructuring.
    • Under this mechanism, bad debt(NPA) of an enterprise which has taken loan from the banks(particularly, Public Sector Banks) can be converted into equity, with majority(51%) shareholding of the bank.
    • The bank can then take the required steps to recover its loan at its own helm as it now possesses the decision-making power.
  • Recapitalization of banks:
    • This involves infusing capital in the banks(PSBs) aggravated with losses due to huge NPAs.
    • This would ensure adequate availability of capital which could impede the losses of the banks and help in its infrastructural development.
    • The government has taken a new initiative called the Indradhanush Plan(comprising of 7 components of banking reforms). One of the components is recapitalization with an amount of Rs, 70,000 crores.
  • Separate bodies for restructuring of assets:
    • Asset Reconstruction Companies(ARC):
      • Bad loans are outsourced to these companies by the banks at a lower value than that of the loan.
      • They also take over the collateral(security) kept by the company with the bank.
      • They then try to recover loans through different mechanisms.
      • Many times they work as mutual funds–>put the acquired assets in one or more funds and then try to get the returns on them.
      • Experts are involved in the process, thus, helping in better recovery.
    • Bad Banks:
      • It is a mechanism in place in the many countries.
      • It can be considered as an alternative to the ARC
      • In this concept, a separate bank specifically for the purpose of dealing with bad loans is constituted.
      • It will tackle NPAs through liquidation, restructuring etc.
      • Though, not in place till now, this option is being pondered upon.
  • Adjudication of disputes regarding restructuring:
    • For now, the mechanism in place is the Debt Recovery Tribunal(DRT) and Debt Recovery Appellate Tribunal.
  • Important act/s in place:
    • SARFAESI(Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) Act, 2002:
      • Under this act, Banks/ Financial Institutions/ARCs are given unprecedented powers to take over management control of a loan defaulter or even capture its assets.
  • Other ways in which NPAs could be tackled:
    • Bank Consolidation: Weaker PSBs could be merged with stronger ones.
    • Attracting private capital.
    • Much more capital than the stipulated capital of 70,000 crores is needed for the recapitalization of banks.
    • Greater transparency in sanctioning of loans to check crony capitalism.
    • Annulling political interference in the PSBs by giving the banks complete autonomy. This would rationalize the procedure of loan sanctioning.

The need is to promulgate a fool-proof and a holistic plan to tackle this menace of NPAs. The government has taken and is taking steps in the right direction in order to handle this NPA turmoil.

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2 thoughts on “Non-Performing Assets(3):Mechanisms and the Way Ahead

  1. So beneficial, look ahead to visiting again

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