The Indian banking industry is already in the eye of storm, battling high incidence of bad loans. Amongst them public sector banks (PSBs) have been hit harder. As at the end of September 2014, the stressed advances (includes bad loans and restructured loans) as percentage of total advances of PSBs stood at 12.9%, as compared to 4.4% for private sector banks. To strengthen bankruptcy laws in India and discourage wilful defaults, RBI has unveiled new provisioning laws.
From 1st April 2015, all new restructured loans of banks will have to be classified as bad loans and provided for as per RBI's rules. Currently, the provision requirement on restructured loan accounts is 5%. But come April 1, 2015, when the restructured loan accounts will get downgraded (to the non-performing asset or NPA category), the provision will go up to 15%. Since banks will be required to set aside more cash (provision) to provide for anticipated losses in future, it is likely to exert pressure on their profitability.
However on a positive side, banks will have no incentive to turn a Nelson's eye on defaulters and will be compelled to sell more bad loans to Asset Reconstruction Companies (ARCs). The defaulting companies, in turn, will be more proactive in managing outstanding debt and approach banks with their revival plans at an earlier stage of stress. Thus the new laws are likely to curb loan slippages in the long run.
No comments:
Post a Comment