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Now Narendra Modi government looks to carrot-and-stick policy to get rid of bad loans crisis

In a carrot-and-stick move, the government is looking at providing more funds than promised for the recapitalisation of public-sector banks (PSBs) but the extra capital infusion will be linked to strict conditions. 

In a carrot-and-stick move, the government is looking at providing more funds than promised for the recapitalisation of public-sector banks (PSBs) but the extra capital infusion will be linked to strict conditions.  Austerity and effective resolution of stressed assets will top the list of conditions for PSBs seeking capital infusion under the already-proposed Indradhanush plan, an official source said. Another source said the austerity plans are mostly about tightening staff benefits, which include industry-standard wage hike and other perks and benefits such as leave travel concessions.
Already, the department of financial services is learnt to have sent a letter to some PSBs, setting these stiff conditions for recapitalisation. Apart from efficient management of non-performing assets (NPAs), these riders include sale of non-core assets and closing of loss-making branches. Quarterly performance goals could be set and these will be monitored regularly. However, if a bank marks a turnaround quickly, staff benefits may be restored early as well.
A tripartite memorandum of understanding between the government, the PSB and its staff has to be signed for the bank to receive capital from the government. A time-bound plan, especially for NPA resolution, will be a must in that agreement, said one of the sources. The rigid conditions come at a time when employees of some PSBs, including loss-making IDBI Bank, are seeking pay revision.

Analysts have termed the 2017-18 budgetary allocation for recapitalisation too low, considering that PSBs are struggling with massive bad loans. The total stressed assets (gross NPAs and restructured standard advances) of commercial banks stood at Rs 9.64 lakh crore as of December 2016, with most of them belonging to PSBs.
The Reserve Bank of India will soon start zeroing in on cases for the resolution of NPAs in consultation with the Indian Banks’ Association (IBA) for necessary action, said one of the officials. Although the RBI can issue fresh guidelines at any point to make the NPA resolution process more effective, any haircut in the process of NPA resolution will be a commercial decision that the banks concerned will have to take.
Nevertheless, the oversight committee (OC) would vet the process of resolution leading to the decision on a haircut and check if the procedures laid down by the central bank have been followed or not, said the official. This will give additional comfort to bankers while taking the bold decisions on haircuts without fear of being singled out in future for probe by investigative agencies.
The government, however, will refrain from intervening in individual cases, as it has already authorised the central bank to do so, said the official. In fact, the rise of stressed assets has raised PSBs’ provisioning requirements, making capital infusion by the government so important. As part of its Indradhanush plan, the government is supposed to provide
Rs 70,000 crore over a four-year period through 2018-19 (`25,000 crore each for each of the first two years and Rs 10,000 crore for each of the next two years) for the recapitalisation of PSBs. While announcing the Indradhanush plan in August 2015, the government had estimated PSBs’ total capital requirement of about Rs 1,80,000 crore over a four-year period through 2018-19. It then proposed to provide Rs 70,000 crore of budgetary support out of the total requirement; the rest — Rs 1,10,000 crore — was to be raised by the PSBs from the market.
“The NPA cases which have already been examined by the joint lenders’ forum (JLF) and but have not yet reached logical conclusion would be taken up by the RBI. And the regulator can direct banks for resolution,” one of the officials said. The IBA and the corporate debt restructuring cell already have necessary inputs on such cases on which the RBI may pass direction, the official said. The ordinance is expected to break the logjam in such stressed accounts.
Last Friday, after authorisation from the Centre following the ordinance to amend the Banking Regulation Act to give more power to the RBI to deal with specific cases, the central bank made changes in the norms for dealing with stressed loans and warned banks of penalty for missing NPA resolution time frames.
NPAs reached 9% of total advances by September 2016, double their level a year earlier. Importantly, more than four-fifths of the NPAs were in PSBs, where the NPA ratio had touched almost 12%. Taking a sample of 39 top banks, CARE Ratings has estimated that NPAs accounted for Rs 6,97,409 crore — or 9.3% of their advances — as of December 2016.