Home / Politics / Policy /  NPAs: Parliamentary panel faults RBI, banks

New Delhi: A parliamentary panel on Wednesday expressed dissatisfaction over the management of bad loans by the central bank and commercial banks, saying a surge in non-performing assets (NPAs) raised questions about the credibility of the systems in place to deal with the issue.

The standing committee on finance cited estimates that gross NPAs at public sector banks may touch 4 trillion by the end of the current fiscal year. Data from corporate database provider Capitaline shows that gross NPAs of 39 listed banks rose to 4.38 trillion in the quarter ended 31 December from 3.4 trillion at the end of the September quarter.

“Such high incidence of NPAs obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans," the committee said in the report presented in Parliament.

The committee also said the Reserve Bank of India (RBI) hadn’t “quite succeeded" in enforcing its rules on bad loans. RBI should not be a passive regulator, but exercise powers of punitive action against banks in case of defaults, it said.

The committee noted with “deep concern" that in spite of various measures taken by the government and RBI, “the NPA problem confronting the financial sector and threatening the stability of the banking system seems far from over".

Bank balance sheets remain under pressure and recent quarterly results of banks are a “grim reminder" of the situation that banks find themselves in, with most of them reporting a sharp dip in profits, with NPAs and provisions for write-offs ballooning.

“On the one hand, the country’s economy is growing fast and competing with economic superpowers and on the other hand, the rising trend of NPAs has the potential to damage this growth story," it said.

“The Committee are thus not happy with the management of the problem on both fronts viz at the level of the RBI and at the level of the banks. The banks have evidently failed to notice the early signs of stress on the loans disbursed by them", the panel, headed by Congress leader M. Veerappa Moily, said.

The panel, which has former Prime Minister Manmohan Singh among its 31 members, said early and timely intervention as well as remedial measures are necessary to stem the rising trend of NPAs.

The panel recommended the establishment of specially empowered committees at all three levels—RBI, banks and borrowers—to continually monitor the status of large loan portfolios.

“Accountability of nominee Directors of RBI/Ministry on the Bank Boards as well as the CMDs/MDs of banks should also be fixed in the matter," it said.

In view of the “fact" that diversion of funds by promoters to unrelated businesses and poor pre-sanction due diligence have been cited as key reasons for bank loans turning toxic, the panel said a forensic audit should be made mandatory for a specific class of borrowers. The extent and the quality of the equity promoters are capable of infusing into a project also needs to be factored in by a lender bank.

The panel also made a case for developing and strengthening a vibrant bond market to finance infrastructure projects.

It asked the government to make structural changes, including reviving development financial institutions for long-term finance and allowing infrastructure finance companies to purchase public works projects turning into NPAs. RBI’s scheme of strategic debt restructuring (SDR), which empowers banks to take control of defaulting entities by converting loans into equity, is an additional tool to cope with NPAs.

A change in management must be made mandatory in such cases involving a wilful default, the panel said.

It added a caveat that the SDR mechanism should be used sparingly so that it does not become a smoke screen for large-scale write-offs. It is necessary that even after SDR is invoked, a wilful defaulter should be made to face penal consequences, the panel said.

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