Faced with ballooning NPAs, the Modi government enacted the IBC in 2016 While putting on hold its plans to implement the so-called “fresh-start process” for indebted poor people under the Insolvency and Bankruptcy Code (IBC), the government wants to first focus on bolstering the IBC architecture to yield quick resolution of toxic assets. The reference here is to the delay in completion of the corporate insolvency resolution process (CIRP) as well as the low amount realised by creditors from their non-performing assets (NPAs) — a fancy nomenclature for bad loans. Let us capture a few basics. Faced with ballooning NPAs, the Modi government enacted the IBC in 2016. This legislation overrides all other subsisting laws and gives a strong handle...
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Category: Money, inflation & interest rate
Bolstering IBC architecture – a joke
While, putting on hold its plans to implement the so-called “fresh-start process” for indebted poor people under the Insolvency and Bankruptcy Code (IBC) (it provides for debt waiver up to Rs 35,000 to the poor who don’t own houses, earn up to Rs 60,000 a year and have assets up to Rs 20,000 each), the government wants to first focus on bolstering the IBC architecture to yield quick resolution of toxic assets while preventing unscrupulous elements from gaming the system. The reference here is to the delay in completion of the corporate insolvency resolution process (CIRP) as well as low amount realized by the creditors from their non-performing assets (NPAs) – a fancy nomenclature for loans that are difficult to...
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Shun accommodative stance policy, now
Reduction in the repo rate or pumping of more liquidity is ill-advised as without any guarantee of propelling growth, it will yield negative outcomes In its bi-monthly Monetary Policy Committee’s (MPC) review announced by RBI Governor Shaktikanta Das on December 8, the policy repo rate or RR has remained unchanged at 4 percent. The reverse repo rate or RRR is also unchanged at 3.35 percent. Besides, it has retained an ‘accommodative’ policy stance for as long as necessary. This is the ninth consecutive time since last August that both policy rates have remained unchanged. Das justified saying, “given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels,...
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Shun ‘accommodative’ policy stance
In its bi-monthly Monetary Policy Committee’s (MPC) review announced by Governor Shaktikanta Das on December 8, 2021, the Reserve Bank of India (RBI) has kept the policy repo rate or RR ( interest rate at which it lends money to banks) unchanged at 4 percent. It has also kept reverse repo rate or RRR (interest rate on the surplus cash kept by the banks with it) unchanged at 3.35 percent. Besides, it has retained an ‘accommodative’ policy stance as long as necessary. This is the ninth consecutive time that both the policy rates have remained unchanged since August 2020. Justifying the decision, Das observed “given the slack in the economy and the ongoing catching-up of activity, especially of private consumption,...
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Directing the retail investor to G-security
Under this centralised system, customers will have a single point of reference to file their complaints, submit documents, track status and provide feedback On November 12, 2021, Prime Minister Narendra Modi launched two innovative customer-centric initiatives of Reserve Bank of India — Retail Direct Scheme (RB-RDS) and the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS). The RDS is intended to give retail investors – mostly the middle class, employees, small businessmen and senior citizens – an option of ‘directly’ investing in their hard-earned savings/surpluses in Government securities, making capital markets ‘easily accessible’ and ensuring that the investment is ‘more secure’. The RB-IOS is aimed at improving customer grievance redress mechanism. What are the schemes? How do these propose to achieve the stated...
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Banks bail out – make it transparent
In the Union Budget for 2021-22, Finance Minister Nirmala Sitharaman had proposed setting up of a bad bank. Crafted as National Asset Reconstruction Company Limited (NARCL), it will bundle up all the non-performing assets (NPAs) of banks and sell them to investors such as private equity funds, alternative investment funds (AIFs) and so on, by putting a turnaround plan in place. On September 16, 2021, she announced the broad contours of the action plan. Under it, the NARCL will purchase NPAs from banks under 15:85 structure, wherein it will pay up to 15% of the agreed/discounted value of the loans in cash and issue Security Receipts (SRs) for the rest. The Government will provide sovereign guarantee – valid for a...
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NPAs – the inevitable monster
According to a statement by the Minister of State for Finance, Bhagwat K Karad in the Parliament, non-performing assets (NPAs) or bad loans of banks declined from a high of around Rs 1036,000 crore as on March 31, 2018 to Rs 896,000 crore on March 31, 2020 and further down to Rs 834,000 crore on March 31, 2021. For comparison purpose, the choice of March 31, 2018 has special significance. Under the erstwhile UPA – dispensation particularly during its second consecutive tenure 2009-2014, banks recklessly gave loans to corporate houses/businesses without assessing the viability of the projects and conducting due diligence. The ability of the concerned projects/businesses to generate required cash to service the loans was in doubt from the...
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Stop the back door bailout of banks
Why not give the capital directly from the Budget instead of following a circuitous route, setting up new institutions and adding to administrative and overhead costs? In the Union Budget for 2021-22, Finance Minister Nirmala Sitharaman has proposed setting up of a bad bank. Crafted as an asset reconstruction company (ARC), it will bundle up all the non-performing assets (NPAs) of banks, buy these at a negotiated (albeit discounted) price and sell them to investors such as private equity funds, alternative investment funds (AIFs) and so on, by putting a turnaround plan in place. An asset management company (AMC) will work on a detailed turnaround-cum-execution plan. The banks plan to transfer nearly Rs 2,00,000 crore of bad loans to the ARC. Every...
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Bailing out banks – through backdoor
In the Union Budget for 2021-22, the Finance Minister, Nirmala Sitharaman has proposed setting up of a bad bank. Crafted as an asset reconstruction company (ARC), it will bundle up all the non-performing assets (NPAs) of banks, buy these at a negotiated (albeit discounted) price and sell them to investors such as alternate investment funds (AIFs) etc by putting a turnaround plan in place. An asset management company (AMC) will work on the details. The banks plan to transfer nearly Rs 200,000 crore of bad loans to the ARC. In return, the ARC will provide 15% upfront cash to banks, and issue security receipts (SRs) for the remaining 85%, to be guaranteed by the Government. The ARC will require a capital infusion of...
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Many a slip…
It is natural to expect an economic rebound in FY 2021-22. But it is vital to take a pragmatic view based on an objective assessment of how the situation unfolds on ground zero The green shoots seen in October, in particular the rise in the Index of Industrial Production (IIP) by 3.6 per cent, have prompted agencies to revise their growth assessment for the current financial year (FY) from the minus 9.5-10.5 per cent projected earlier to minus 7.5-8.5 per cent, now. For the FY 2021-22, when the impact of the virus is expected to subside to a large extent due to the availability of the vaccine, it is only natural to expect an economic rebound. However, it is necessary...
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