NPA move:analysts question empowering RBI to micromanage banks

Tempering expectations, ratings agencies today warned that the ordinance on NPA resolution will take time to work on the ground, and also questioned the need to get RBI into micromanaging a commercial problem.
"While one can't expect a quick-fix solution from government to fix this deep-rooted problem of NPAs, the ordinance does try to address the recent build-up of apathy towards the resolution decision-making process specially among public sector lenders," India Ratings said in a statement.
It also said the ordinance is "one of the many" steps taken by government on the NPA issue.
"A larger question pertains to the independence of banks in making commercial lending decisions and making the regulator a part of this process does pose questions on the effectiveness of bank managements as a custodian of depositors hard earned money," it asked.

Another agency, Icra, said RBI used to give general instructions earlier as well, whereas the new provisions empower it to issue borrower-specific instructions to banks to initiate the resolution under the Insolvency and Bankruptcy Code of 2016.
"Initiation of proceedings under the Bankruptcy Code may force borrowers and lenders to come on a common platform and accelerate the resolution, given the limited timeframe of 180 days (with provision of a one-time extension of 90 days) under the Bankruptcy Code, else face a liquidation process," Icra said.

While welcoming this as steps in the right direction, Icra also raised some doubts about the efficacy of the move.

"The ability of the banks, borrowers and creditors to agree on the resolution plan under the Bankruptcy Code will be critical to prevent the liquidation of the borrower," it said and pointed out that borrowers' willingness to arrange fresh funds and lenders' ability on taking haircuts will be critical for resolution.
The largest rating agency Crisil, however, termed the move as a "judicious combining of the strengths" of Bankruptcy Code, support of RBI and determination of government.
"The move will give banks the much-needed teeth to resolve their NPA problems without fear of consequences. It is a systemic positive," it said.

Care Ratings said a bulk of NPAs have been caused by the top 50 defaulters and it is these accounts where resolutions and recoveries are needed at the earliest.
"It would be crucial to take further measures that could ease the valuation mismatch, address legal issues which would improve funding interest in the stressed assets by foreign investors," it said.