NPA Ordinance to Help Tackle Mounting Bad Loans

An Indian pedestrian walks out of The Reserve Bank of India (RBI) building in Mumbai on April 29, 2008. India's central bank held key interest rates steady but hiked the percentage of cash banks must hold in reserve to 8.25 percent to curb inflation riding at over three-year highs.It was the second time the Reserve Bank of India had announced an increase in the cash reserve ratio (CRR) in two weeks as it seeks to suck out excess liquidity in the banking system and fight inflation now at 7.33 percent. AFP PHOTO Sajjad HUSSAIN

MUMBAI : Although the Reserve Bank of India (RBI) and the government have been working to tackle the problems of mounting bad loans, the Ordinance on NPAs will define the way forward in this regard, a top official said on Friday.
 Terming it as “a very interesting piece” of legislation signed by President Pranab Mukerjee on Friday, RBI Executive Director Sudarshan Sen said efforts are on to resolve the problem of Non Performing Assets (NPAs).  However, he warned: “This is a continuing process…nothing happens overnight. These are hard problems, these are difficult problems, but we are determined to solve them.”
 Post-enactment, six Non Banking Financial Companies (NBFC) had registered with the RBI of which three are systemically important.  Sen said the size of the sector at the last count was approximately Rs 3,200 crore which declined over the previous year due to various factors.  “What is of concern also is the high NPAs in the sector…With 29 per cent gross NPA ratio and 11 per cent net NPA ratio, this is a little alarming as is also the negative ROA (return on assets) and ROE (return on equity), so these areas need to be addressed,” urged Sen.  Among the factors hindering healthy function of factors was non-availability of recourse under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI).  However, last year the benefit of Enforcement of Security Interest was extended to all systemically important NBFCs, including NBFC factors, which is expected to improve recovery by factors and reduce their NPA levels, he said.  Referring to RBI’s Trade Receivables Discounting System (TReDS), Sen said that it will not only facilitate discounting of invoices and bills of exchange but also greatly facilitate the factoring business.  He added that it will be a huge source of information for tapping potential clients.  About the implementation of Insolvency and Bankruptcy Code and the status of a factor — whether financial creditor or operational creditor, Sen said the definitions might suggest that factor would be treated as an ‘operational creditor’.

(With Inputs from IANS)

By TIS Staffer
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