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RBI priority to bad asset control

Mumbai, Nov. 21: The Reserve Bank of India today expressed its resolve to crack down on the menace of bad loans that had plagued the banking system.

Bad loans ballooned almost 36 per cent to Rs 1,94,000 crore in 2012-13.

After having begun the process of creating a central repository on large borrowers — both individuals and entities — with exposure of more than Rs 10 crore to help banks deal with credit risks, the central bank today said that tackling the non-performing asset (NPA) problem would engage its “priority attention”.

During 2012-13, gross NPAs in the banking system leapt from Rs 1,42,900 crore in the previous year. The gross NPA ratio at the aggregate level rose to 3.6 per cent at the end of March 2013 from 3.1 per cent at March-end a year ago. Among lenders, the deterioration in asset quality was most perceptible for the State Bank of India, with its NPA ratio reaching a high of 5 per cent at the end of March this year.

It may be recalled that soon after taking charge as the governor, Raghuram Rajan had said the central bank would look at ways to tackle rising NPAs in the system.

“Promoters do not have a divine right to stay in charge, regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures,” he had then said while observing that the RBI would come out with norms on restructuring bank NPAs. Since then, the RBI has also been impressing upon the banks the need to identify early warning signals to bring down the occurrence of bad loans.

In its report on Trend and Progress of Banking in India-2012-13 released today, the RBI said banks should follow various measures put in place by the Reserve Bank and the government effectively for resolution and recovery of bad loans.

It added that lenders should also strengthen their due diligence, credit appraisal and post-sanction loan monitoring systems to minimise and mitigate the problems of increasing NPAs.

The report also called upon banks to improve the effectiveness of the recovery system.

The RBI also stressed the need to accelerate the working of debt recovery tribunals (DRTs) and asset reconstruction companies (ARCs).

Apart from the channel of DRTs and ARCs from where banks can recover bad loans, they can also use the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act).

According to the report, during 2012-13, the largest amount was recovered through the Sarfaesi act. Bad assets recovered through this act accounted for about 80 per cent of the total amount of NPAs.

The RBI said banks ought not to be forced to invest in government securities.

“It is necessary to reduce banks’ requirements of investing in government securities in a calibrated way, to what is strictly needed from a prudential perspective,” the report said.

According to the RBI, this could happen as the penetration of other financial institutions, such as pension funds and insurance companies, improves in the G-Sec market.

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