Bad loan mess: Centre plans indemnity for bankers to settle NPAs

FinMin seeks views on setting up external committee to approve one-time NPA settlement applications of PSBs.

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To reduce pressure of bad loans on the banking system, the government is discussing the possibility of extending indemnity to bankers dealing with one-time settlement of non-performing assets (NPAs). Since settlement of NPA accounts usually happens at a haircut or a discount, bankers are reluctant to aggressively pursue this fearing vigilance and investigative agencies backlash in later years.

Simultaneously, the finance ministry has sought banks’ views on the proposal of setting up an external committee which can approve one-time NPA settlement applications of the public sector banks.

The finance ministry is in discussions with banks and the Indian Banking Association to formalise these suggestions, a government official said. “Along with the amendments being planned in the Sarfaesi Act and DRT Act, the government is discussing indemnity (to bankers) and setting up an external panel to screen OTS (one time settlement) applications,” the official said.

Sources said the discussions on indemnity are at a preliminary stage but the idea is to provide bankers exemption from future damages/losses on account of decisions taken to reduce NPAs, especially in cases where business are facing economic slowdown. Indemnity is unlikely to be provided in cases where proper due diligence was not followed. The panel to screen banks’ loan settlement proposal will comprise of finance ministry and RBI officials, external experts and judges.

“Unless there is a safety net ensuring that banker will not be penalised in later years for viable business decisions (on settlement of NPAs), there will not be much recovery of NPAs,” said a senior banker with IDBI Bank, asking not to be named. The banker said the idea of safety net to bankers working on loan settlements was discused during Gyan Sangam meeting — a retreat of head of public sector financial institutions — in Gurgaon in March.

Replying to a debate on the Finance Bill, 2016 in Parliament on Thursday, finance minister Arun Jaitley said NPAs happened because of two reasons: Some loans were given wrongly and weak economic and businesss cycly led to rise in bad loans in sectors like steel. “NPA issue with banks is an issue of concern. Some loans may have been given wrongly. I am not going into who is responsible for it. But weakened business cycle due to global economy has also impacted bank balance sheets,” he said.

Experts said absence of protection from vigilance/regulatory backlash is a lacunae in the Indian banking system.

“Each stressed asset situation requires a customised resolution, many of which will lead to an impairment in the lenders position. The issue is that as soon as the question of impairment arises, lenders are reluctant to take decisions for the fear of being investigated later on, even for genuine commercial decisions. It’s a deep flaw in the system,” said Nikhil Shah, managing director, Alvarez & Marsal, India, a firm specialising in turnaround management and performance improvement of companies.

“Providing bankers with some form of protection such as an indemnity or a panel approving loan settlements should improve decisions which will lead to better economic outcomes for lenders. The government should empower the lenders to do so,” Shah said.

To reduce NPAs, the government has taken a number of steps including changing the PSU bank heads’ appointment process, appointing private sector players at the state-owned banks and asking banks to invoke personal guarantee of promoters in an event of default. But the NPA situation continues to deteriorate.

The gross NPA of the PSBs increased from 5.43 per cent as on March 2015 to 7.30 per cent as on December 2015. Public sector banks’ bad loans increased by Rs 94,666 crore in first nine months of the current financial year, as per the finance ministry data. An amount of Rs 1,30,156 crore as on December 2015, was classified as NPAs in PSBs for borrowers exceeding Rs 500 crore.

The ratio of top 30 NPAs to NPAs above Rs 1 crore (large borrowers) as on March 2015 for scheduled commercial banks is 51.79 per cent. The percentage of amount recovered against the write-off done by PSBs has declined from 24.50 per cent in 2012-13 to 20.59 per cent during 2013-14 and further to 15.23 per cent during 2014-15.

On February 16, the Supreme Court took suo motu cognisance of a report in The Indian Express which disclosed that Rs 1.14 lakh crore of bad debts had been written off by state-owned banks between financial years 2013 and 2015.

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First published on: 09-05-2016 at 11:31 IST