The Union Cabinet recently approved a set of key measures to tackle the non-performing assets (NPA) in the banking system.
According to the new policy, the Oversight Committee (OC) will have special powers to resolve NPAs. Till date, the OC did not have authority to resolve NPAs. But, with the new policy and more powers, the committee will work for resolution of bad loans.
The Reserve Bank had set-up an oversight committee under the Scheme for Sustainable Structuring of Stressed Assets (S4A) with the main job of overseeing loan restructuring process in a transparent manner.
The new policy also allows banks to take a haircut with permissible limit. The banks have been reluctant to take haircut. But, the policy has in place a new formula on cash-to-cash basis.
The OC will recommend how much haircut banks can take using this formula.
Another key point of new policy is that a company that has defaulted on its loans could be merged with a healthy company from the same sector.
New guidelines for Joint Lenders Forum will also be a possibility now.
The panel, headed by the Chief Economic Advisor, also looked at recasting of loans in different sectors.
The public sector banks have nearly Rs 3.8 lakh crore NPAs as of December 2016. Of this, 70 percent are of big corporate houses.
Indications are that the new policy will allow banks to take a haircut within permissible limit. A new formula to give effect to this is being put in place.
The OC will recommend the extent of haircuts that banks can take using this formula.
President Pranab Mukherjee approved the ordinance facilitating amendment in the Banking Regulation Act, 1949. It will pave the way for a new framework to deal with the issue of non-performing assets.
The new ordinance is expected to give more power to the lenders which will help to deal with the NPAs.
The NPA issue has been plaguing the whole banking system and with it threatened the very stability of the economy.