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Opinion A new vision for election manifestos Now that the Bills on goods and services tax GST have been passed by the Lok Sabha, the top priority must be fixing the problems of public sector banks.
This requires action on three fronts. We must i accelerate recoveries from non-performing assets NPAsii recapitalize public sector banks to Banking sector reforms and npa a their ability to expand credit, and iii introduce reforms that will increase the efficiency of these banks This article explores how we might address these challenges.
Most of the large NPAs reflect solvency problems. Such projects can only be rescued if banks take a haircut and reduce the debt. Understandably, this is something bankers hate to do.
There are two ways of handling the problem. The Strategic Debt Restructuring Scheme allows banks to convert the debt into equity, take control of the project, remove the existing management, and induct new management. Ideally the project should be auctioned off to the highest bidder and the existing management, if not suspected of malpractices, should also be allowed to bid.
The difference between the amount paid for the equity and the value of the debt converted, is a market-determined debt write-off. The scheme has not worked for a variety of reasons.
These include problems of coordination among the different banks involved, regulatory uncertainties especially for infrastructure projects which deter new investors, and the unwillingness of bankers to accept a sufficient write-down of the outstanding debt.
There is also the practical problem of running the projects taken over until a new management comes in. Banks are ill-equipped to do this. The second option is to work with the existing management and negotiate a suitable debt reduction.
It has the advantage of not having to look for a new management, but since the incumbent management remains in place, and the debt write-off is not competitively determined, there is a danger that the concessions given may attract the charge of cronyism and corruption.
Bankers worry about this since Section Bank employees are public servants for the purpose of the Act, and the term public interest is not well defined.
But since the oversight body will also consist of public servants, the problem remains. Poca clearly needs to be amended, and a proposal pending in Parliament should be expedited.
However, this may not suffice, because proposals for a settlement have to be developed by bank managements, and then submitted to the oversight mechanism. Bankers have no incentive to propose large reductions in debt, especially since it is an implicit acknowledgement of poor lending practices on their part.
Realistic pricing of the assets transferred is absolutely critical, since otherwise the hole in the balance sheets of banks will simply be transferred to the new institution.
banking sector, developments that have taken place and its impact on Indian commercial banks as a result of process of banking reforms initiated in This paper also examines the trends of NPAs in. The banking sector, handling 80% of the flow of money in the economy, needed serious reforms to make it internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and competitive economy by adequately supporting the country's financial needs. PERFORMANCE OF NON-PERFORMING ASSETS (NPAS) IN INDIAN COMMERCIAL BANKS MS. ASHA SINGH Gross NPA, Net NPA, public sector banks, private sector banks. 1. Introduction A Committee on Banking Sector Reforms known as Narasimham Committee was set up by.
It should remain in the books of the banks, and can then be recapitalized appropriately. Bankers will be much more willing to transfer their NPAs at a low price to a new public sector agency, than offer the same benefit to a private party. The new entity can then offer realistic levels of debt reduction without making a loss on its books.
It will also be much less vulnerable to the charge of corruption if the public interest and urgency involved in cleaning up NPAs is clearly spelt out in the mandate of the entity.
Its proposals could also be vetted by a high-level oversight board. The new entity would have to be funded by the government, perhaps by government guaranteed bonds which are exchanged for NPAs offloaded from banks.
It could work in partnership with private asset management companies specializing in particular areas to bring in new investors. It could experiment with both approaches—a change in management in some cases, and retaining existing managements in others.
These ideas have been discussed in several quarters for some time. It is time to take the plunge and announce the establishment of the new institution, and set a target for taking up of the largest NPAs in the near future.
Early success will help clear the air. The strategy needs to be completely reworked since the scale of NPAs is much larger than was then expected. Bank profits after provisioning for the NPAs will therefore be much smaller than expected. The scope for raising funds from the market has also reduced given the poor performance of the banks.
The burden on the budget is therefore bound to be higher. Three difficult questions arise. If so, it may be possible to attract one or more strategic investors into some of the public sector banks.
They need not be given any direct role in management, but could be given a seat on the board, as China has done. These fears can be addressed by building suitable provisions into the shareholders agreement, and announcing that the government, which will remain the dominant though not the majority shareholder, will ensure that reservations continue.
The latter approach will increase the overall efficiency of the public sector banking system as a whole, and incentivise the weak banks to improve their performance.Banking Sector Reforms in India INTRODUCTION.
Download. Key words: Liberalization, SLR, CRR, Capital Adequacy, Relationship Banking, NPA. Spread. The government now decided to introduce comprehensive economic reforms. The banking sector reforms were part of this package. The main objective of banking sector reforms was to promote a.
In the context of economic liberalisation and growing trend towards globalisation (external liberalisation), various banking sector reforms have been introduced in India to improve the operation efficiency and upgrade the health and financial soundness of banks so that Indian banks can meet internationally accepted standards of performance.
A Committee on Banking Sector Reforms known as Narasimham Committee was set up by RBI to study the problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee identified NPA as a major threat and recommended prudential measures for income recognition, asset classification and provisioning requirements.
These. The banking sector, handling 80% of the flow of money in the economy, needed serious reforms to make it internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and competitive economy by adequately supporting the country's financial needs.
BANKING SECTOR REFORMS AND NPA: A STUDY OF INDIAN COMMERCIAL BANKS Meenakshi Rajeev and H P Mahesh 1 Abstract The issue of non -performing asset s (NPA), the root cause of the recent global financial crisis, has. Request Article PDF | Banking Sector Reforms and NPA: A study of Indian Commercial Banks | Citations: 6 | The Institute for Social and Economic Change, Bangalore Institute for Social and Economic.