The Significance of Foreign Exchange Market The main significance of foreign exchange market is...
In June 2017, the apex banking body in India – the Reserve Bank of India (RBI) – identified 12 loan defaulters. The total default value of these defaulters was almost 25% of the bad loans or Non-Performing Assets (NPA) in the banking industry in the country. In this article, we will discuss The Banking Regulation (Amendment) Ordinance, 2017 – a positive step for the banking industry .
|Non-Performing Assets of public sector Banks during the time||Rs. 6.64 lakh crore|
|Total Stressed Assets of Banks during the time (public + private sector)||Rs. 8.02 lakh crore|
These are loans or advances where the borrowers have not been able to pay either the principal or the interest in a period of 90 days from the stipulated time period.
Public sector or nationalized banks turned out to the biggest lenders to the large industrial and infrastructure projects that had the promise of becoming big-time hits and do considerably well in the future with expansion plans.
As per the ruling government, the Ordinance should have been passed a long time back. The requirement was critical now because banks were facing a fund shortage situation because of the non-performing assets, bad loans, and stressed assets. Despite concerted efforts by the banking industry and the government, the situation seemed to be going out of hand.
While initially the reason behind the stuck-up situation was attributed to issues with the availability of raw materials for mega projects and land acquisition hassles, later the problem magnified to insurmountable limits. Part of the problem was also that the banking industry was giving loans without adequate checks in the last decade. The banks were lending huge amounts without even safeguarding their interests and having proper laid down repayment plans from the borrower.
As a result, in the next few years, the situation started to limit their capacity or rather choke them of funds to give further loans to small creditors and that in turn started to affect the overall economy of the country. Even with many schemes the RBI introduced, the toxic debt situation seemed far from being resolved which prompted the central government to step in and give additional powers to the apex bank to help the banking industry especially the multiple banking consortiums to resolve the NPA and stressed assets situation. Hence it was essential that the apex bank is given the right to intervene and resolve the situation.
As per the Finance Minister, Mr. Arun Jaitley, even getting 40-50 of the major corporate borrowers to pay up the defaulted principal or interest amount was enough to resolve the financial crisis on an immediate basis.
Data available from the Financial Stability Report 2016 issued by RBI states that:
The Credit Suisse estimated that almost 40% of the debtors are companies that have an interest coverage ratio of less than 1.
It is interesting to note that when the amendment was announced as the Bill was introduced in the Parliament, the market and the industry welcomed it with open hands so much so that bank shares gained as much as 6% immediately on the opening of trading on the day of the announcement.
These are primarily loan accounts where the borrower has either defaulted in terms of repayment of the loan or the schedule of repayment had to be reworked out because of the inability of the borrower to pay.
The Ordinance has been welcomed by the banking industry especially as it is seen as a progressive step. The new Ordinance empowers RBI to protect banks from vigilance authorities posing probing questions though it cannot as such protect the banks from being questioned by these vigilance authorities.