The Cabinet on Wednesday approved a mechanism for the resolution of massive stressed assets of banks and sent it for the President’s consideration as it involves issuance of an ordinance to amend the Banking Regulation Act, 1949.
In what could give protection to the domestic steel industry, without raising the hackles of the World Trade Organisation (WTO), the Cabinet also approved a policy that mandates use of domestic steel for public-sector infrastructure projects.
In addition, paving the way for the Centre to exit the hotels business completely, the Cabinet approved a process of disinvestment, which will start with the Ashok brand of hotels in Bhopal, Guwahati and Bharatpur, although these three will be handed over to state governments, rather than private parties. While finance minister Arun Jaitley said details of the NPA resolution plan will be announced only after the approval of the President, sources told FE that the amendments would give more teeth to banks to deal with the vexed issue, especially with public-sector banks. The President’s assent is expected very soon, said the sources. Section 35 of the Act empowers the Reserve Bank of India to inspect banks/scrutinise their books and accounts.
The government had earlier indicated that any proposed framework to deal with the bad loan crisis would include setting up multiple oversight committees (OCs) under the aegis of the RBI to monitor the progress of non-performing assets (NPAs), that too on a case-by-case basis. The OCs are expected to help banks with decision-making.
Jaitley had earlier said that 30-40 companies accounted a major chunk of total NPAs with banks. As of December 2016, commercial banks had stressed assets (gross NPAs and restructured standard advances) worth Rs 9.64 lakh crore, with most in public-sector banks. In March, Jaitley had held a key meeting with RBI governor Urjit Patel, financial services secretary Anjuly Chib Duggal and other top officials on the NPA issue. NPAs reached 9% of total advances by September 2016, double their level a year earlier. Importantly, more than four-fifths of the NPAs were in the public-sector banks, where the NPA ratio had touched almost 12%. A sample of 39 top banks showed NPAs accounted for Rs 6,97,409 crore or 9.3% of their advances, as of December 2016.
With huge infrastructure investments planned in the state sector — the budget outlay for development in 2017-18 itself is Rs 3.96 lakh crore — the move to mandate purchase of domestic steel by state-run projects would boost the business for local steel companies, including private-sector Tata Steel and JSW Steel. It may also encourage global steelmakers like ArcelorMittal and Posco to invest in India. Over a fifth of steel consumption in India is by the government, PSUs and projects funded by the government at present.
The proposal, curiously, echoes Donald Trump’s “use-only US steel” policy. It would not only help consumption of domestically produced steel to grow faster, but would also further rein in imports. The government had in the recent past taken a slew of measures to protect the domestic industry from low-priced imports mainly from China, Japan and South Korea. The measures include imposition of minimum import price (MIP) and anti-dumping and safeguard duties. MIP, and to an extent safeguard duties, can invite action by the WTO, especially if exporting countries lodge complaints with it.
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However, an article under the General Agreement on Tariffs and Trade allows an exception to “procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale”. Several countries have in the past used this article to protect domestic industries from import competition.
In parallel, the Cabinet also approved a new National Steel Policy that envisages Rs 10 lakh crore investment to create more capacity in the steel sector, which has until recently been reeling under weak demand and rising raw material prices. The steel sector has a staggering Rs 3 lakh crore outstanding to the banking system and is one of the largest contributors to NPAs.
“The purchase preference to domestically manufactured iron and steel products would help accomplish the Prime Minister’s vision of ‘Make in India’ and encourage domestic manufacturing,” steel minister Birender Singh said. Analysts said that in order to make the new policy a win-win for all, the steel industry will have to ensure not just quality products but also make sure that infrastructure firms get them at affordable prices. Bringing cheer to over 55 lakh pre-2016 civil and defence pensioners, the Cabinet approved modifications to the Seventh Pay Panel-induced pensionary benefits that would cost the Centre an additional Rs 5,031 crore for 2016-17.