What is the issue?
- The Insolvency and Bankruptcy Code (IBC) and the Indhradhanush scheme are rolled out by the government.
- However, the slow pace of its progress in resolving stressed banks is getting to be a cause of concern.
What are the government initiatives in this regard?
- The IBC, 2016 is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
- This is to deal with insolvency resolution processes for individuals, companies and partnership firms.
- Indradhanush plan is a seven pronged plan to revamp the functioning of public sector banks.
- The seven elements include appointments, board of bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.
- The recent Alternative Mechanism is a framework to speed up the mergers of public sector banks.
What issues are to be addressed?
- Insolvency applications - Banks should come forward and file insolvency applications under the IBC, on their own without waiting for regulatory directions from the RBI.
- This “pre-default” stage out-of-court restructuring, with very first signs of initial stress can make resolution process faster and simpler.
- Higher Provisions - Banks should also comply with RBI directions to make higher provisions for accounts to be referred under the IBC.
- A provision is an amount that is put aside in an account to cover a future liability.
- Higher provisions could ensure that banks are fully protected against likely losses in the resolution process.
- Balance sheets - There is a need for a more concrete plan for public sector bank balance sheets.
- This is essential to ensure that banks withstand the losses during resolution.
- And also to have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits.
- Capital infusion There is a considerable need for substantial additional capital infusion into public sector banks by the government.
- This is essential given the scale of NPAs and lower internal capital augmentation of public sector banks.
What lies ahead?
- The government has come up with various options for resolving issues like stressed assets, inefficient banks, balance sheet problem, etc.
- However, the developments hint at a need for all these to work together to make a substantial progress in the resolution process.
- Government should address the massive recapitalisation need of banks and soon publicly announce a feasible plan in this regard.
- This is crucial to provide clarity to investors and restore confidence in the markets about the banking system.
Source: Business Standard
