The promulgation of the Ordinance yesterday for resolution of Non Performing Assets (NPAs) is another measure to tackle the crisis gripping the banking sector. Yet, the ordinance could be another dead ball and nothing that one can hope would work wonders due to lack of market participants. A look at the implication of the ordinance…
An Ordinance is a temporary law made by the government (with the consent of the President) when the Parliament is not in session. The law has a life of only six months within which, it has to be passed by the Parliament to remain in force. The Ordinance on banks NPAs attempts to utilise the provisions of another law passed last year, the Insolvency and Bankruptcy Code 2016. The code gives power to banks to take possession of the assets of a loan defaulter without going through lengthy court procedures which has to be then sold off within a specified time period. Since the code calls for a time bound sale, banks fear that they may not get a good price for the assets and hence reluctant to invoke the Act. (Read more on that -http://indiaeconomyandbusiness.com/2016/05/08/insolvency-and-bankruptcy-code/).
The ordinance now gives power to RBI to “instruct” banks to invoke this code on case by case basis which would make it obligatory for the banks to act. Other than that, the Ordinance also gives RBI power to instruct banks to act in a specified manner for resolution of NPAs directly or through a committee where there may not be a need to invoke the insolvency code. For instance, it may ask a bank to accept a discount on its debt called “haircut” or waive interest charges or any such measures which makes the resolution of an NPA easier. While the move, in some ways, impinges upon the autonomy of the banks, it would help protect banks from the charges of mala fide actions since this would now happen under the direct supervision of RBI. The Ordinance can be specially useful to tackle some of the large corporate defaulters which account for almost half of the bad loans.
Among the measures that RBI had earlier taken over last 3-4 years to tackle NPAs are creating a mechanism for strategic debt restructuring (SDR), mechanism for creation of Joint lenders’ Forum (JLF) and tweaking the provisions of SDR into another scheme called S4A (Scheme for Sustainable Structuring of Stressed Assets). (Read more on this – http://indiaeconomyandbusiness.com/2016/06/14/restructuring-sdr/). However, nothing seems to have worked so far largely due to differences in valuation and lack of ‘turnaround specialist’; companies who thrive in dealing with stressed assets.
While the move is definitely important, it needs to be looked at from the overall market perspective assuming ‘bad asset’ as a product. Any market needs sufficient number of both buyers and sellers to become successful. While the Ordinance may increase the number of sellers of non performing assets, the market still lacks buyers, who are even more reluctant because of the complexity involved. An idea floated was to encourage public sector enterprises specially in the sectors such as Steel and Power to participate more actively in taking over these assets. PSUs are specially suited since they have the expertise and money and an attitude which is not purely commercial but also takes into account the societal necessity of doing a job.
(Please read the other two articles to get a better understanding of the issue..)
(Image courtesy of hywards at FreeDigitalPhotos.net)