What is the issue?
- RBI has recently announced various measures for tackling the bad loans.
- Such measures fails to concentrate on resolving the issue from its root.
What are the steps taken by the RBI to resolve the crisis?
- Initially, the central bank in its revised framework on resolving stressed accounts had scrapped the old restructuring schemes such as SDR, S4A or 5/25.
- This led to the increase in the provisioning for bad loans by the banks with respect to the existing norms for provisioning.
- Recently, the RBI identified 12 non-performing assets (NPAs), totalling 25 percent of India's gross NPAs, which would be taken up under the Insolvency and Bankruptcy Code (IBC).
- And it relaxed the norms for provisioning from 50 per cent to 40 per cent for those 12 accounts under IBC.
- Provisioning is an expense where banks set aside a portion of their capital to make up for the unpaid loans which are 'doubtful' or can potentially default.
- The provisions such as scrapping of restructuring schemes and tightening of banking regulations have brought in more transparency in the bad loans.
What are the concerns with RBI’s measures?
- The accelerated NPA recognition would imply over Rs.25, 000 crore of additional provisioning for banks.
- Brief measures such as these, do little to re-build the eroded confidence of investors and depositors in the banking system.
- As an outcome of these measures, in long run banks would witness steep rise in provisioning beyond the current level to handle the bad loans.
- Apart from this, the recovery of accounts mentioned in IBC would also remain a challenge.
Source: Business Line
