Global rating agency Moody’s said on Tuesday that the new mechanism to resolve the issue of massive toxic assets with the banks are broadly along the same lines as some of the earlier measures, but it doesn’t address the lack of capital at the state-owned banks, which has prevented them from writing down non-performing loans (NPLs) to realistic levels.
“These measures (Ordinance) improve the efficacy of NPL-resolution mechanisms and are a credit positive. However, they do not address the lack of capital at the state-owned banks, that has prevented them from writing down NPLs to realistic levels. We continue to expect NPL resolution to be a relatively long-drawn-out process,” Moody’s said.
Last Friday, after the authorisation from the Centre following the Ordinance to amend the Banking Regulation Act to give more power to RBI to deal with specific cases, the central bank made changes in the norms for dealing with stressed loans and warned banks of penalty for missing NPA resolution time frames.
Moody’s said the latest measures are broadly in the same vein as a long series of actions that the government and the regulator have taken to address banks’ asset quality challenges. This include past measures to strengthen the functioning of joint lenders’ forums as well as various dispensations to provide banks with flexibility in resolution of bad loans such as the 5:251 refinance scheme, strategic debt restructuring (SDR) and the scheme for the sustainable structuring of stressed assets (S4A). “These actions, while being useful in some cases, have not materially quickened the pace of NPL resolution,”Moody’s said.