While the details of the ordinance on the resolution of non-performing assets are still awaited, the broad contours of it are already out in public domain and the experts are still cautious on many of its aspects.
Although the government has said that the ordinance on the resolution of non-performing assets (NPAs) that was promulgated last week will help tackle the growing menace of bad loans as it provides required powers to Reserve Bank of India (RBI) to deal with the situation. While the details of the ordinance are still awaited, the broad contours of it are already out in public domain and the experts are still cautious in many of its aspects.
Let’s see what experts have to say about the ordinance:
Global rating agency Moody’s said earlier this week that the new mechanism to resolve the issue of bank NPAs is 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 had said.
Fitch Ratings says NPA clean-up will strengthen over the next few years despite implementation challenges.
“RBI direction that pushes banks into initiating insolvency processes against borrowers could help to break a deadlock caused by concerns among bank officials that decisions on troubled borrowers will attract investigation by anti-corruption agencies,” Fitch Ratings said.
“The resolution of non-performing loans is likely to require significant haircuts if the re-priced loans are to attract attention from private investors and asset reconstruction companies. Further losses at some of the weakest small to medium sized state banks could pressure them to shrink or to eventually exit the system by entering into forced mergers. We believe it has become more likely that the number of state banks will fall in the medium term,” the US-based agency said.
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Angel broking believes that the incorporation of the Insolvency and Bankruptcy code (IBC) by the central Govt and RBI is a welcome move to address the bad asset menace.
Siddharth Purohit (Sr. Equity Research Analyst- Banking) says in a note, “The advantages of the implementation of the IBC are:
- A definite time frame to resolve insolvency cases
- IBC shall consolidate existing laws like SARFAESI, SICA, and Recovery of Debt Due to banks and Financial Institutions Act
- Bankers can pursue cases under the RBI/ Overseeing committee without facing the undue fear of being questioned at a later date by investing agencies.
- Any dissenting banker has to come on board and this will drive the efficacy in efficiently implementing the IBC”.
“Although definite guidelines are yet to be issued by RBI, the ambiguity remains on the quantum of hair cut (if any) desired to be undertaken on the asset sale or liquidation of the said asset as an alternate recourse. Albeit the overhang on the banking stocks shall be the excess provisioning required to be undertaken if deep haircuts are taken on the stressed assets,” Purohit continued in his report.
Harun Rashid Khan
Harun Rashid Khan, former Deputy Governor RBI believes the ordinance in itself might not be enough to rid the banking sector of the mess caused due to stressed assets. “Need more action to create infrastructure for speeding up NPA cases,” said Khan in an interview with ET Now.
“Insolvency code could be one measure to resolve large Non-Performing Loans. Insolvency structure in nascent stage currently. Need for more focused & dedicated National Company Law Tribunals to look at insolvency cases,” khan further said in the interview.