Ordinance welcome, long-term measure needed
The Union Government's decision to take the Ordinance route to tackle the growing problem of non-performing assets (NPAs) or bad loans of banks, especially that of public sector banks (PSBs), is understandable for two reasons. First, it would have been a time-consuming process if a Bill were to take the Parliament route. After its subsequent introduction, it would have to pass several stages — it would have to be debated, discussed, scrutinised and then various amendments would have to be made. This would have consumed precious time. Second, at this stage, when the Government has to tackle Rs9.64 trillion of bad loans, any move that offers a ray of hope to resuscitate the same will be and should be welcomed.
NPAs have now become a matter of national urgency that need to be tackled here and now. In essence, the Government, by way of an Ordinance, has amended the Banking Regulation Act. While the details of the resolution are not available, changes to Section 35A of the Act and certain provisions of the Bankruptcy Code, are on the cards, which should give more teeth to the Reserve Bank of India. With the new amended package coming into force, the central bank will be empowered to direct the banks on how to effectively resolve stressed assets and NPAs, and the way to deal with defaulters. It may also provide relaxation in terms of current guidelines. The bad loan scenario in the country had indeed been grim. It rose by over one lakh crore rupees in the first nine months of last fiscal to Rs6.07 lakh crore by December, 31, 2016. Gross NPAs of PSBs stood at Rs5.02 lakh crore at the end of March 2016, up from Rs2.67 lakh crore at the end of March 2015. The Union Ministry of Finance, along with the RBI, had been grappling with ways to tackle the growing menace and had also devised ways and means to tackle the same, through various settlement schemes or selling off bad loans for asset reconstruction, but the banks had been reluctant to adopt these measures, fearing probes.
Mounting bad loans is bad for several reasons. First, it makes banks unhealthy. There are a large number of PSBs in our country that are supposed to lead the way in the banking system and it does not bode well that they are over-burdened. Second, if certain banks are suffering from fiscal ill-health or crippling bad health and are on the verge of collapsing, then they are hardly going to drive the economic growth of the country, which is the top priority of the Government. Reasons for mounting NPAs are many. One, there has been a lack of due diligence on the part of authorities in PSBs in the disbursement of loans. In addition is the erratic conduct of loanees (the large ones). Second, political interference over the years if not decades has forced the banks to go against the provisions laid by them. Then, too much of flexibility with regards to payment of loans had been a big problem. While the Government has shown a strong desire to combat NPAs by way of an Ordinance — this will come as a big boost to the banking sector — the banks too must do their bit. It is their responsibility to be more careful in the disbursement of major loans to organisations and individuals and not get carried away by the halo which often surrounds high-profile customers.