System in India is not capable of addressing the NPA problem: Parliamentary panel

Parliamentary panel headed by Veerappa Moily has raised doubts about the ability of the existing system to handle the NPA problem. The Panel in its report submitted in the Lok Sabha has observed that the RBI and banks are not able to tackle the problem despite their responsibilities.

NPAs have emerged as the biggest macroeconomic risks at present as it reached nearly Rs 4.38 trillion as on end 2015. PSBs have the highest level of NPAs in the banking system.

The panel’s two suggestions are to be well noticed. First one is its observation that the present system comprising the RBI and the PSBs are not able to manage NPAs. Second, the panel goes tough on defaulters and observed that the names of willful defaulters are to be published.

In recent times, provisioning and write-offs are constantly used to bring back health into the banking system. But the trend of default is not coming down as many borrowers remains willful defaulters.

“Such high incidence of NPAs obviously raises serious questions on the credibility of the mechanisms to deal with NPAs and stressed loans,”

Interestingly, the Panel’s dissatisfaction over the management of bad loans by the central bank and commercial banks was pronounced in the report.

                The Panel observed that Reserve Bank of India (RBI) hadn’t “quite succeeded” in enforcing its rules on bad loans. The central banks should not be a passive regulator. It suggested that the RBI should exercise powers of punitive action against banks in case of defaults.

The committee suggested that strict actions should be taken against willful defaulters.

Implication of naming willful defaulters is that once their name is noticed, necessary actions that amount to criminal procedures should be initiated.

The panel, that included former Prime Minister Manmohan Singh in its 31 members, observed that early and timely intervention and remedial measures are necessary to stop the rising trend of NPAs.

At the same time, the Panel also made a backward looking suggestion of reviving the old Development Financial Institutions (like the IDBI). In the past, the DFIs have recorded high level of NPAs and hence they were restructured into banks.