Strategic Debt Restructuring – RBI’s Aggressive Stance On NPAs

Growing Non Performing Assets(NPAs) have been a greater concern in Indian Banking sector from the past few years. NPAs are those assets in which borrower has failed to make interest or principal payments for 90 days or 3 months in a row. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs. Thus the banks have to set aside a specified amount as per RBI norms to cover those losses in-case they crystallize, which are known as provisions. The provision is hence not used in lending purposes putting further downside risk on banks’ profitability and increases the overall cost.

RBI in its recent announcement has said “NO” to these increasing costs and has suggested a wonderful measure called as Strategic Debt Restructuring. RBI has now allowed the banks to take 51% or more stake in the defaulting companies after restructuring of their loans for the first time. The move is aimed at resolving the stress in the banking system and the current level of slippage. The NPAs of the Indian Banking sector has been rising amidst weak economic conditions. The current Gross NPA of the Indian banks stands at around 4.4% levels but has been estimated to rise sharply in the coming years, to around 5-6 %. ICRA and Crisil have estimated the numbers to be 5.9% and 4.5% respectively. Heres how the banks been performing and how much does each category of bank contributes to the credit and the NPAs levels. The scenario even post 2013 has remained the same with the PSBs contributing highest in the growing NPAs while Pvt Banks keeping them highly muted.

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There were many measures taken by the RBI to reduce the levels. One of the important steps was introducing the 5/25 loan restructuring scheme. SDR is another way of reducing NPAs. Following are the steps as to how SDR will work:

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The overall process seems to be a wonderful move to reduction in NPAs. Selection of the right and competent promoters, non availability of secondary markets to sell stake according to SEBI rules, provision costs being reduced only on sale of stake and the chance of non sale-ability of certain companies will be the barriers in real-time implementation process. Apart from these, there are a set of conditions in Joint Lenders Forum (JLFs). Without fulfilling those it will not be able to take the NPAs off its balance sheets. RBI has done the needful to give banks the extra powers to fix its balance sheet, but its depends on banks’ performance in deciding if NPAs will be reduced thus reducing costs and provisions or will it change adversely increasing costs further. Although banks might face problems in implementing the same under current conditions, it is a positive leap towards a better and a more robust banking structure.

Thank you. 🙂


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Akshay Baregar

A hardcore analyst who loves to read about finance, upcoming concepts, ​and their applicability. Have always wanted to become an analyst and been thinking like one from the recent past. This is my attempt to write and make the world around me aware of the financial happenings and the likely impacts/ effects on the Indian/Global Economy. My favourite topics are monetary policies, fiscal reforms, market movements, predictions, wealth management etc . Hoping for an excellent response and feedback from the readers.

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