Public Sector Asset Rehabilitation Agency
• Economic Survey 2016-17 proposed Bad bank or PARA.
• Bad Bank is an institution which specializes in loan resolution process, so that banking system can focus on its core business of deposit and loans.
• PARA is a centralised resolution of NPA crisis, as against other existing steps which are decentralised.
Need for PARA
• Public sector banks (PSBs)- Rs 7.34 lakh crore by the end of 2017
• Private sector banks – Rs 1.03 lakh crore
In early 2000s
• Corporate profitability was at its highest
• Therefore, corporates increased their hiring, investment
• It lead to increase in wages
• Capital inflows increased - 9% of GDP
• Investment - 38% of GDP
• Debt/ Equity ratio increased
However, in the late 2000s:
• Costs increased due to delays in environmental and land clearances.
• Revenues collapsed due to global downturn
• RBI increased interest rates due to rising inflation
• Rupee depreciated leading to higher debt-servicing liabilities
According to Economic Survey, PARA can help in tackling NPA crisis:
• Early resolution so that Funds for creation of new credit can be used
• Wilful Defaulters cannot escape because of non-coordination in Joint Lenders’ Forum
• Large Defaulters comprise more value of NPAs, as 50 top defaulters account for 71% of NPAs. Therefore, PARA, with focus on top cases can lead to faster recovery
• PARA with its mandate on time-bound resolution, may be better equipped with decision making capabilities, in comparison to bank management, who fear CVC and CAG enquiry on debt write-offs.
• ARCs have not been successful, as they have bought only 5% of NPAs, according to ES 2016-17
• Without PARA, banks have resorted to refinancing, which leads to delaying the cases. This further leads to lack of credit and investment in the economy.
• PARA helps to enhance investment in banks and improves credit ratings, so that Indian firms have access to cheap global credit.
• Lack of Political will to implement the steps recommended by PARA
• Establishing prices of stressed advances is a time consuming and debatable issue
• Cleaned balance sheets may lead banks to lend more freely
• Huge capital is required for recapitalisation
• Setup is time consuming process
Economic Survey has proposed 4 steps with the name of 4Rs for resolution of NPA crisis.4 Rs refer to Recognition, Recapitalization, Resolution, and Reform.
• Recognition – Banks must value their assets accurately as far as possible
• Recapitalisation – Banks’ capital position must be safeguarded via infusions of equity
• Resolution– The underlying stressed assets in the corporate sector must be sold or rehabilitated
• Reform –future incentives for the Private Sector and corporates must be set-right to avoid a repetition of the problem
The Economic Survey 2014-15 had proposed a 4-D prescription to the Indian banking sector, which is hobbled by policy constraints, which create double financial repression, and, by structural factors, impede competition. The four Ds include:
• De-regulation– addressing the statutory liquidity ratio (SLR) and priority sector lending (PSL)
• Differentiation – within the public-sector banks in relation to recapitalisation, shrinking balance sheets, and ownership
• Diversification – of source of funding within and outside banking
• Disinterring – by improving exit mechanisms
Also, there are certain short-term measures to improve the situation:
• Reform Insolvency and Bankruptcy Code keeping the current challenges in mind
• Take steps to discourage wilful defaulters and provide adequate support to officials acting against them. For eg. Fugitive Economic Offenders Bill
Amend Prevention of Corruption Act to shield bankers and professionals from investigative witch-hunts
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