Central Bank Begins Work, But More Money Needed to Kill Bad Loans

Central Bank Begins Work, But More Money Needed to Kill Bad Loans

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Central Bank Begins Work, But More Money Needed to Kill Bad Loans

The RBI has said it will put in gear a plan to resolve the massive backlog of bad loans (file)
NEW DELHI: Armed by a recent change in law that gives it to more power to act, the Reserve Bank of India has said it will reconstitute its two-member Oversight Committee as it puts in gear a plan to resolve the massive backlog of non-performing assets or bad loans that public sector banks have built.

The oversight committee presides over the restructuring of bad loans with the banks and the central bank said on Monday that its scope needs to be widened. The panel is currently made up of former State Bank of India chairman Janaki Ballabh and former chief vigilance commissioner Pradeep Kumar.

The government has tweaked its laws with an ordinance or executive order recently to help tackle a record $150 billion or Rs. 9.64 trillion rupees in troubled bank debts, giving the central bank greater power to identify and enforce resolution on specific cases of bad loans and amending the old system in which the lengthy legal processes for recoveries were involved.

It authorises the RBI to direct banks to initiate an insolvency resolution process in the case of a default. The provisions will be put up for Parliament’s approval in the monsoon session in July.

The central bank is yet to announce a decision on which cases will be taken to the bankruptcy courts. While the government has empowered the RBI, it has not provided for how banks will get the additional capital to support the resolution of bad loan cases and experts say the new measures may not be enough to dent the NPA crisis.
The resolution of stressed assets involves a two-phase process – one assessing the debtors’ business viability and the second deciding whether the business should be liquidated or restructured. Both create losses for the lending bank, which will need to support the central bank with capital infusion. Higher the loss, higher the infusion needed.

This means more money may go in to kill bad money.

Fitch Ratings estimated earlier this month that banks will need about $90 billion in new capital to tackle bad debt and meet global Basel III banking rules taking effect in March 2019.

Bad debt rose as huge loans to sectors such as infrastructure came undone after sections of the economy came to a standstill following the 2008 global financial crisis.

[“Source-ndtv”]