Bad loan burden: Government sets up panel to weigh ARC

9 June 2018: The government has established a commission under Punjab National BankNSE 5.05 % non-executive chairman Sunil Mehta to judge the establishment of an asset regeneration company in yet another push to help fix the bad loan burden that afflicts the banking industry, said acting finance minister Piyush Goyal. 
 
Others on the board include State Bank of IndiaNSE 1.24 % chairman Rajnish Kumar and Bank of Baroda managing director PS Jayakumar. 
State-run banks are also considering screening committees to assure that decision-making is not delayed due to fear of future investigations and these are likely to be charged with former bankers or retired judicial officers, said Goyal, who’s holding the finance portfolio pending the return of Arun Jaitley from medical leave. 
Goyal dismissed reports of a merger of some state-run banks and said the government doesn’t interfere in management decisions, reiterating that it is left to the lenders to determine their strategy. 
 
“The government of India feels that the sovereignty of the banks should be Indian banking is under severe stress with bad loans rising to Rs 10.17 lakh crore and stressed assets at nearly 15% of total loans. While the government instituted the Insolvency and Bankruptcy Code (IBC) to resolve default cases, the resolution has been slow as the new system settles down. 
 
It may be recalled that the former central bank governor Raghuram Rajan hadn’t been in favor of a so-called bad bank, which would take over all the rotten assets of lenders, thus allowing the .. hem to make a fresh start. His contention was that this would still mean the government (and, by extension, taxpayers) was on the hook. Prime Minister Narendra Modi’s government is committed to the state-run banks and will back them fully as these institutions are vital for the economic and social transformation of the country, Goyal said. The minister said banks have themselves come up with ways to overcome restrictions inflicted by the regulatory Prompt Corrective Action (PCA), which restricts lending by banks with weak financials. 
 
“There are many accounts which are also facing certain restrictive covenants because of restrictions placed on some banks in lending for which a process has been devised by the bankers among themselves to ensure that credit flow to good borrowers, where some of the PCA banks are also a part of the consortium, will also not face any struggle in meeting their working capital needs,” Goyal said. 
More than 10 banks are under PCA after bad loans rose past 10% of total loans. Unless these banks increase recoveries, they will not get additional capital. 
The government maintained in FY18 to recapitalize state-run banks to the tune of Rs 2.1 lakh crore, of which Rs 90,000 crore has already been invigorated. Most of it is has been received in the form of provisions for bad loans. 
The first of several restrictions under PCA is enforced when a bank’s capital falls below 10.25 or net bad loans go past 6% of total loans. At various stages, checks on hiring and expansion come into force. 
Goyal also said state-run banks that have been headless for the past few weeks would get chief executives soon as the government was addressing the issue.