NON PERFORMING ASSETS – NEED FOR PRAGMATIC AND PRACTICAL REGULATORY FRAMEWORK

The Reserve Bank of India, Indian Banks Association and almost all Public Sector Banks are deeply concerned about significant rise in non performing assets during last one year. The Indian economy have been passing through an unprecedented turbulent time. Many important sectors of the economy have been adversely affected. Telecom sector is passing through critical policy issues after 2G scam. Power Sector has been suffering due to lack of coal and fuel linkage. Coal mining has been subjected to serious scrutiny by CBI and Hon’ble Supreme Court. The Iron ore mining has been subjected to a Supreme Court ban. The national highways’ development projects in BOT mode have severely suffered due to financial closure, policy issues besides political impasse and a complete rethinking is happening about the approach towards toll collection and its sanctity. Similarly heavy industries, steel sector and real estate construction sector has been passing through difficult time during last 3 years. Similar description can be seen about many other crucial and basic sectors. Even the financial market is strained by severe liquidity crunch. The capital market has not been able to channelize any fresh resources to business and industry for last many years. In certain sectors including power sector disbursements are not being made by the banks, in spite of full financial closure and sanction in place due to apprehension in the minds of lenders. Air India and Kings fisher indicate Aviation sector difficulties. In the aforesaid backdrop, we also need to consider as per the regulatory framework in place, the term loan and all other borrowings are treated as non performing assets on the basis of a very strict rule of 90 days or more delay in repayment to the banks. Also in case of time overrun i.e. delay in implementation of projects, the term loans are categorized as non performing assets. Once the loans are categorized as non performing in respect of a borrower, no further financial facility of borrowing of any kind is considered by the banking system. Even the banking system has to mandatory make a provision for doubtful debt the interest portion cannot be recognized as revenue. This rule of RBI have worked very well during the economic growth period, but in the current atmosphere several issues have emerged for kind consideration of the financial system regulator i.e. RBI. RBI is known for a very pragmatic and professional approach and therefore we wish to bring out the following for a public debate and consideration by the regulator for a more pragmatic and practical approach :-

• The Reserve Bank of India can consider as to whether a uniform approach of 90 days benchmark is appropriate for all the sectors or it could be differently considered for different sectors of the economy.
• We have seen that US and European governments have provided for special treatment for early recovery of various sectors. RBI has also considered special dispensation for Air India, and certain large infrastructure projects which were specially impacted due to sect oral reasons. RBI may now  consider issues and economic situation of each sector and accordingly work out a special financial package so that genuine difficulties and problems of the sector are appropriately considered while determining NPA criteria.
• The banks may be allowed to consider all cases which are currently non performing on case by case basis and to provide necessary heading, additional resources and re-phasing all repayments, wherever considered genuine. The bank boards may be delegated to devise an appropriate policy framework in this regard.
• Wherever the finance are adequately secured, additional lending for specially structured products to meet the needs of the borrower may be permitted.
• The banks may be freely permitted to extend corporate loans, loans for general business purpose and any other borrowings needed to meet the requirements as assessed by the management and the bank, subject to adequate security and / or cash flow, may be considered. A new pragmatic and practical policy and regulatory framework is needed both at the RBI level as well as at level of the banks. Indian economy currently need a special treatment to not only improve the sentiments but also growth. The current negative sentiment has impacted mandatory circulation and M3 significantly and not only it is necessary to recognize the financial distress at an early stage but also at the same time bold steps and support is needed from the financial sector to meet the needs of the borrower so that on a sustained basis a fair recovery for the loans can be ensured. It is important to add that all kinds of diversion of funds has to be checked strictly. The banking approach has to be developmental and principled basis rather than rule basis and investigator.