Friday, 19 July, 2019

Banks’ bad loans down at 9.34 lakh crore at FY19-end


  • As per a reply from the Ministry of Finance, the NPAs of scheduled commercial banks (SCBs), after reaching a peak of Rs 10,36,187 crore as on March 31, 2018, have declined by Rs 1,02,562 crore to Rs 9,33,625 crore as on March 31, 2019, on the back of steps taken by the government.
  • The SCBs have effected a recovery of Rs 4,01,424 crore over the last four financial years,including a record recovery of Rs 1,56,746 crore during 2018-19.

Background

  • Asset Quality Review (AQR) initiated in 2015 for clean and fully provisioned bank balance-sheets revealed high incidence of Non-Performing Assets (NPAs).
  • As a result of AQR and subsequent transparent recognition by banks, stressed accounts were reclassified as NPAs and expected losses on stressed loans, not provided for earlier under flexibility given to restructured loans, were provided for.
  • Further, all such schemes for restructuring stressed loans were withdrawn.
  • Primarily as a result of transparent recognition of stressed assets as NPAs, gross NPAs of PSBs, as per RBI data on global operations, rose from Rs. 2,79,016 crore as on March 2015, to Rs. 6,84,732 crore as on March 2017, to Rs. 8,95,601 crore as on March 2018.

Causes

  • As per the RBI, the primary reasons for spurt in stressed assets wereaggressive lending practices, wilful default / loan frauds / corruption in some cases, and economic slowdown.

Steps to combat the menace of NPAs

4Rs strategy

  • 4Rs strategy stands for recognition, resolution, recapitalisation and reforms.
  • It consists of recognition of NPAs transparently, resolution and recovery of value from stressed accounts, recapitalising of PSBs, and reforms in PSBs and the wider financial ecosystem for a responsible and clean system.
  • Over the last four financial years, PSBs have been recapitalised to the extent of Rs. 3.12 lakh crore, with infusion of Rs. 2.46 lakh crore by the Government and mobilisation of over Rs. 0.66 lakh crore by PSBs themselves enabling PSBs to pursue timely resolution of NPAs.

IBC

  • Change in credit culture has been effected, with the Insolvency and Bankruptcy Code (IBC) fundamentally changing the creditor-borrower relationship, taking away control of the defaulting company from promoters/owners and debarring wilful defaulters from the resolution process and debarring them from raising funds from the market.

Fraud prevention

  • Directions to banks to examine all NPA accounts above Rs 50 crore from the angle of possible fraud.
  • Obtaining certified copies of passport of promoters/directors of companies availing of loans exceeding Rs 50 crore are the other measures.
  • Heads of Public Sector Banks have been empowered to request for issue of Look Out Circular.
  • Initiation of criminal proceedings.

Institutional provisions

  • Enactment of Fugitive Economic Offenders Act 2018
  • Creation of Central Fraud Registry.
  • Establishment of the National Financial Reporting Authority

Monitoring

  • Monitoring has been strictly segregated from sanctioning roles in high-value loans.
  • Specialised monitoring agencies combining financial and domain knowledge have been deployed for effective monitoring of loans above Rs. 250 crore.

Other steps

  • Board-approved Loan Policies of PSBs now mandate
  • Tying up necessary clearances/approvals and linkages before disbursement.
  • Scrutiny of group balance-sheet and ring-fencing of cash flows, non-fund and tail risk appraisal in project financing.
  • Use of third-party data sources for comprehensive due diligence across data sources has been instituted
  • To ensure timely and better realisation in one-time settlements (OTSs), online end-to-end OTS platforms have been set up.

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