Day 23 – Q 3. What are the recent initiatives announced by the government to address the challenge of NPAs in the banking sector? Explain. (15 Marks)

3. What are the recent initiatives announced by the government to address the challenge of NPAs in the banking sector? Explain. (15 Marks)

बैंकिंग क्षेत्र में एनपीए की चुनौती से निपटने के लिए सरकार द्वारा हाल ही में घोषित पहल क्या हैं? समझाएं।

Approach-

Candidates need to write about the attitude and then elucidate how attitude matters though being little things or mental construct it makes big difference.

Introduction

As per the economic survey 2022, Banks have weathered the pandemic better than expected with non-performing assets (NPAs) lesser than prior to Covid and its resultant lockdowns. At the same time restructured loans have also increased due to the various dispensations offered to support businesses as a result of which there could still be a lagged impact of distress on their assets as the economic impact plays out.

The recent initiatives announced by the government to address the challenge of NPAs in the banking sector 

• The government has approved providing Rs 30,600 crore as state guarantee for the security receipts issued by the bad bank, National Asset Reconstruction Company Ltd (NARCL). 
• This government guarantee mechanism will be paving the way to operationalise the country’s first bad bank in which majority 51 per cent stake is held by public sector banks.
• This guarantee will allow banks to transfer their non-performing assets (NPAs) to NARCL, which will buy the stressed assets on payment of 15 per cent of the amount in cash and the balance 85 per cent in security receipts; the move will reduce bad loans on the books of banks,
• The government also announced the setting up of a ‘bad bank’, including an asset reconstruction company and asset management company to take over the existing stressed debt of banks. 
• The bad bank will be a bank set up to buy the bad loans and other illiquid holdings of another financial institution.
• NARCL and the Indian Debt Resolution Company Ltd, or IDRCL, are both part of the plans of the government to address the issue of bad loans on the books of banks. The latter will manage the assets and help resolve the debt. 
• The creation of the two, an asset reconstruction company (NARCL) and an asset management company (IDRCL) was announced.
• It is expected that the asset management company – India Debt Resolution Company Ltd (IDRCL) – will resolve stressed assets worth ₹2 lakh crore in five years.
• The bad bank structure will assist in consolidation of debt, currently fragmented across various lenders, thus leading to faster, single-point decision making, including through Insolvency and Bankruptcy Code (IBC) processes.
• It will incentivise quicker action on resolving stressed assets, thereby helping in better value realisation. 
• This approach will also permit freeing up the management bandwidth of banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. 
• The government’s guarantee will also enhance liquidity of SRs as these are tradable, this basically means banks can sell these down to the market.

Conclusion

While it is necessary to pump in more money in to the system to help sustain businesses and to boost the economy, it is also equally a necessity to keep bad loans at bay. Bad loans lead to higher NPAs over time, so due diligence has to be observed when offering funds.