NPAs Current Affairs - 2019
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Union Finance Ministry announced proposal for amalgamation of three public sector banks- Bank of Baroda, Dena Bank and Vijaya Bank. The combined entity after consolidation will create India’s third largest bank. Post this merger, number of PSU banks will come down to 19 from 21, accounting for more than two-thirds of banking assets in the country.
This was second major banking sector consolidation in recent year after merger of five associate banks of State Bank of India with itself. The amalgamation will be through share swap which will be part of scheme of merger. The proposal will now need approval of boards of these individual banks. This amalgamation will particularly help Dena Bank, the weakest of the three which is currently under Reserve Bank of India’s Prompt Corrective Action (PCA) framework and has been barred from extending fresh loans.
The merger of three PSBs will help create strong globally competitive bank with economies of scale. It will enable realisation of synergies for networks, low-cost deposits and subsidiaries of these three PSBs. The merger will result in substantial rise in customer base, operational efficiency, market reach and wider bouquet of products and services. The merged entity will have better financial strength and will place all three banks on Finacle Core Banking Solution (CBS), a platform that helps banks enhance agility and efficiency of operations, while significantly improving customer experience across channels. The merger of these three banks will have no adverse impact on employees and customers of individual banks.
Key Features of merged entity
- Net non-performing assets (NPA) ratio: The amalgamated entity will have net NPA ratio of 5.71% as against 11.04% of Dena Bank, 5.40% for Bank of Baroda and 4.10% for Vijaya Bank.
- Provision coverage of amalgamated entity will have 67.5%, higher than PSB average of 63.7% and it will have a total of 9,489 branches across the country.
- Cost to income ratio of amalgamated entity is estimated at 48.94%, better than PSB average of 53.92%.
- Capital Adequacy Ratio of amalgamated entity is estimated at 12.25%, higher than regulatory requirement.
The merger of these three state-owned banks was part of government’s agenda of consolidation of PSBs. It was proposed by Alternative Mechanism comprising Chairperson Arun Jaitley. Under it, government did not want merger of weak banks and has therefore suggested idea of amalgamating one weak bank and two strong banks, in order to create entity which is able to increase banking operations. This also indicates approach that government may deploy in future consolidation.
Lok Sabha has passed Insolvency and Bankruptcy Code (Amendment) Bill, 2018 to bring relief to the home buyers and Micro, Small and Medium Enterprises (MSMEs). The Bill replaces ordinance promulgated in this regard and amends the Insolvency and Bankruptcy Code, 2016.
Insolvency and Bankruptcy Code (IBC), 2016 provides time-bound process to resolution of insolvency among companies and individuals. Insolvency is situation where individual or company is unable to repay their outstanding debt. Government in November 2017 had set up Insolvency Law Committee to review IBC and identify issues in its implementation and suggest changes. The Committee had made several recommendations such as exempting MSMEs from certain provisions of IBC, treating allottees under real estate project as financial creditors, reducing voting thresholds of committee of creditors (CoC), among others. Subsequently, President had promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 in June 2018 after approval of Central Government.
Key Features of Bill
Status of allottees: The Bill clarifies that allottee under real estate project i.e. buyer of under-construction residential or commercial property will be considered as financial creditor, as amount raised from allottees for financing real estate project has commercial effect of a borrowing.
Representative of financial creditors: It specifies that in certain cases, such as when debt is owed to a class of creditors, the financial creditors will be represented on committee of creditors by authorised representative. These representatives will vote on behalf of financial creditors as per prior instructions received from them.
Voting threshold of committee of creditors: The voting threshold for decisions of committee of creditors has been lowered from 75% to 51%. For certain key decisions of committee like appointment of resolution professional, approval of the resolution plan and increasing time limit for insolvency resolution process threshold has been reduced from 75% to 66%.
Ineligibility to be resolution applicant: Bill amends criteria which prohibits certain persons from submitting resolution plan. It provides that this criterion will not apply if such applicant is financial entity and not related party to debtor with certain exceptions. It specifies that such bar will apply if such guarantee has been invoked by creditor and remains unpaid.
Applicability of Code to Micro, Small, and Medium Enterprises (MSMEs): The Bill specifies that ineligibility criteria for resolution applicants regarding Non Performing Assets (NPAs) and guarantors will not be applicable to persons applying for resolution of MSMEs. It empowers Central government in public interest to modify or remove other provisions of IBC while applying them to MSMEs.
Withdrawal of submitted applications: The Bill increases vote required for withdrawal resolution application from National Company Law Tribunal (NCLT) after such process has been initiated by 90% vote of committee of creditors.