Bad loan cleanup: NPA problem concentrated on a very few cases, free riders will not be allowed to carry on, says Sanjeev Sanyal

By: | Published: May 5, 2017 5:47 PM

Principal Economic Advisor Sanjeev Sanyal on Friday said that the Non-performing assets or NPAs issue was gridlocking the banking sector.

Principal Economic Advisor Sanjeev Sanyal. (Facebook)

Principal Economic Advisor Sanjeev Sanyal on Friday said that the Non-performing assets or NPAs issue was gridlocking the banking sector. Speaking to telivision channel CNBC TV18 Sanyal said that resolving big cases will bring liquidity to the system. “Now the next step wil be taken in Mumbai and not Delhi. It is up to the Reserve Bank of India (RBI) to expand oversight panel or set up a new one,” said Sanyal. RBI had made an Oversight Committee to look into process of the cases referred to it by the different banks.

Highlighting the fact that the NPA problem is concentrated on a very few cases, sectors, Sanyal said that the RBI now has a lot of power to carry out the process of resolution. Sanyal said, “One of the key issue was compliance, where some lenders would not agree. RBI will now be able to empower oversight panel that can approve deal.” He said that free riders will not be allowed to carry on. The government had earlier setup the Insolvency and Bankruptcy Board of India (IBBI) under the Insolvency and Bankruptcy Code, 2016.

President Pranab Mukherjee last night signed the ordinance to amend the Banking Regulation Act, giving RBI powers to direct banks to initiate insolvency and bankruptcy in case of default. Finance Minister Arun Jaitley in March had said that the core problem of NPAs is with very large corporates, though few in numbers, predominantly in the steel, power, infrastructure and textile sectors. He said that they had expanded their capacity during the boom period (2003-08) but could not face the onslaught of global financial crisis and consequent slow down thereafter.

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The Economic Survey 2016-17 presented in the Parliament in January stated that India has been trying to solve its ‘Twin Balance Sheet’(TBS) problem – overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis. So far, there has been limited success. The problem has consequently continued to fester: Non-Performing Assets (NPAs) of the banking system (and especially public sector banks) keep increasing, while credit and investment keep falling. Now it is time to consider a different approach – a centralised Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

As per the Survey, gross NPAs has climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. At this level, India’s NPA ratio is higher than any other major emerging market, with the exception of Russia. The consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades. As this has occurred, growth in private and overall investment has turned negative. A decisive resolution is urgently needed before the TBS problem becomes a serious drag on growth.

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