Non Performing Assets (NPA) Current Affairs - 2019
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The Reserve Bank of India (RBI) has removed three banks, Dhanlaxmi Bank, Allahabad Bank and Corporation Bank from the PCA framework by moving them out of its weak-bank watchlist.
Basis for the decision of RBI
- The government has infused fresh capital into various banks including some of the banks currently under the PCA framework. As part of the capital infusion, Corporation Bank had received Rs 9086 cr and Allahabad Bank had received 6896 cr.
- Capital Infusion to both of these banks has shored up their capital funds and also increased their loan loss provision to ensure that the PCA parameters were complied with.
- Dhanlaxmi Bank was taken out of the PCA framework, subject to certain conditions and it would be under continuous monitoring, as the bank is found to be not breaching any of the Risk Thresholds of the PCA framework.
Earlier in the year, the RBI had removed the Bank of India (BoI), Bank of Maharashtra (BoM) and Oriental Bank of Commerce (OBC) from the PCA framework. With the removal of Allahabad Bank and Corporation Bank from the list, five PSBs which includes United Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank remain under the PCA framework.
PCA: Bone of Contention
The PCA framework had become a bone of contention between the government and the RBI. In India, PCA kicks in when banks breach any of the three key regulatory trigger points namely capital to risk-weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA) whereas globally PCA kicks in only when banks slip on a single parameter of capital adequacy ratio.
The government and independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.
Tags: Allahabad Bank • Capital to risk-weighted assets ratio • Central Bank of India • Corporation Bank • Dena Bank • Dhanlaxmi Bank • Indian Overseas Bank • Non Performing Assets (NPA) • RBI • Reserve Bank of India • return on assets • UCO Bank • United Bank of India
RBI’s Internal Advisory Committee (IAC) has identified 12 bank accounts constituting nearly 25% of the gross bad loans for immediate referral and resolution under the bankruptcy law. Each of the 12 identified accounts was having more than 5,000 crore rupees of outstanding loans, of which at least 60% was classified as non-performing by banks as of March 31, 2016. The RBI, however, has not disclosed the names of the accounts.
RBI’s internal advisory committee (IAC) mainly comprises of its independent board members. Based upon the recommendations of the IAC, the RBI will issue directions to the banks to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). These cases will be accorded priority by the National Company Law Tribunal (NCLT). The NCLT is the arbitration authority for cases filed under IBC.
For those loan accounts which do not meet the criterion recommended by the IAC, the concerned banks should finalise a resolution plan within six months. The details of the resolution framework for these other non-performing accounts will be released soon by the central bank.
Indian banks have an estimated Rs 10 trillion as stressed assets. Of this, gross bad loans amounts close to Rs 7.7 trillion and the rest constitutes the restructured loans.
In May, the Union Cabinet had cleared an ordinance that amended the Banking Regulation Act and gave more powers to Reserve Bank of India to deal with non-performing assets (NPAs) in the banking sector. The Amendments has empowered the RBI to act against loan defaulters and defaulting companies under the bankruptcy code. These amendments would pave for faster resolution of the NPAs as the bankruptcy code provides for a time-bound winding up of companies and recovery of secured loans.
The assets of the banks which don’t perform are called Non-Performing Assets (NPA) or bad loans. If customers don’t pay either interest or part of principal or both, the loan turns into a bad loan. According to RBI, loans on which interest or instalment of principal remains overdue for a period of more than 90 days from the end of a particular quarter will be classified as a Non-performing Asset.