RBI Governor Raghuram Rajan may have hit the nail on the head by saying that banks may require deep surgery to clean up their balance sheets and put stressed projects back on track, but the Central Bank, too, needs to gear up for a more effective role in handling the problem of bank loans, turning bad, going ahead.
The Parliamentary Standing Committee on Finance is right in pointing out in its latest report yesterday that though various guidelines have been issued by RBI ‘from time to time to ensure effective management of NPAs and to enable speedy and prompt recovery, it ‘does not seem to have quite succeeded, as a regulator, in so far as implementation and enforcement in letter and spirit of its own guidelines, on stressed loans is concerned’.
The panel has gone ahead and said that mere issuing of guidelines by RBI does not seem to have yielded the desired results, and it would ‘expect RBI to monitor and follow it up with the banks and financial institutions on a regular basis till concrete outcomes materialise’.
It is high time the central bank, therefore, understands that such pro-active action will not only put any doubt about its handling of the issue that has gained large proportions now, at bay; but, will also enable it to, as the panel has stressed, ‘review the guidelines, whenever required and plug loopholes, if any’.
In the December quarter, listed banks added nearly Rs one lakh crore in bad loans, which has prompted even the Supreme Court to ask RBI to furnish details of companies that have each defaulted on loans amounting to more than Rs 500 crorewithin 6 weeks.
Gross NPAs of banks in the December quarter, based on 42 listed banks, increased to 6.5% of the advances from 5.1% in the September quarter.
So, the prescription of the standing committee for the RBI to deal with the situation is: “As the Committee would not like the RBI to be a passive regulator, when major lapses occur in banks, it would be in the fitness of things if RBI exercises its regulatory powers vis-à-vis banks to take punitive action in cases of default and to enforce their guidelines……RBI as a regulator should have its regulatory role well delineated and thus not have its Director in the Board(s) of the Banks as part of their management, as conflict of interest may lead to avoidable laxity.
In fact, an objective evaluation of the efficacy of different instruments/schemes implemented by banks to deal with their NPAs/Stressed assets like one -time settlements, CDR, SDR, 5 by 25 scheme, ARC sale etc., has also been due for quite some time and it should be done quickly so that the problems could be identified to make them more meaningful in dealing with the NPAs.