The Insolvency and Bankruptcy Code (IBC) and the Indhradhanush scheme are rolled out by the government.
However, the slow pace of its progress in resolving stressed banks is getting to be a cause of concern.
What are the government initiatives in this regard?
The IBC, 2016 is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
This is to deal with insolvency resolution processes for individuals, companies and partnership firms.
Indradhanush plan is a seven pronged plan to revamp the functioning of public sector banks.
The seven elements include appointments, board of bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.
The recent Alternative Mechanism is a framework to speed up the mergers of public sector banks.
What issues are to be addressed?
Insolvency applications - Banks should come forward and file insolvency applications under the IBC, on their own without waiting for regulatory directions from the RBI.
This “pre-default” stage out-of-court restructuring, with very first signs of initial stress can make resolution process faster and simpler.
Higher Provisions - Banks should also comply with RBI directions to make higherprovisions for accounts to be referred under the IBC.
A provision is an amount that is put aside in an account to cover a future liability.
Higher provisions could ensure that banks are fully protected against likely losses in the resolution process.
Balance sheets - There is a need for a more concrete plan for public sector bank balance sheets.
This is essential to ensure that banks withstand the losses during resolution.
And also to have enough capital buffers to intermediate well the huge proportion of economy’s savings that they receive as deposits.
Capital infusion There is a considerable need for substantial additional capital infusion into public sector banks by the government.
This is essential given the scale of NPAs and lower internal capital augmentation of public sector banks.
What lies ahead?
The government has come up with various options for resolving issues like stressed assets, inefficient banks, balance sheet problem, etc.
However, the developments hint at a need for all these to work together to make a substantial progress in the resolution process.
Government should address the massive recapitalisation need of banks and soon publicly announce a feasible plan in this regard.
This is crucial to provide clarity to investors and restore confidence in the markets about the banking system.
