RBI has recently announced various measures for tackling the bad loans.
Such measures fails to concentrate on resolving the issue from its root.
What are the steps taken by the RBI to resolve the crisis?
Initially, the central bank in its revised framework on resolving stressed accounts had scrapped the old restructuring schemes such as SDR, S4A or 5/25.
This led to the increase in the provisioning for bad loans by the banks with respect to the existing norms for provisioning.
Recently, the RBI identified 12 non-performing assets (NPAs), totalling 25 percent of India's gross NPAs, which would be taken up under the Insolvency and Bankruptcy Code (IBC).
And it relaxed the norms for provisioning from 50 per cent to 40 per cent for those 12 accounts under IBC.
Provisioning is an expense where banks set aside a portion of their capital to make up for the unpaid loans which are 'doubtful' or can potentially default.
The provisions such as scrapping of restructuring schemes and tightening of banking regulations have brought in more transparency in the bad loans.
What are the concerns with RBI’s measures?
The accelerated NPA recognition would imply over Rs.25, 000 crore of additional provisioning for banks.
Brief measures such as these, do little to re-build the eroded confidence of investors and depositors in the banking system.
As an outcome of these measures, in long run banks would witness steep rise in provisioning beyond the current level to handle the bad loans.
Apart from this, the recovery of accounts mentioned in IBC would also remain a challenge.
