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The Modi government is positioned to play hardball over non-performing assets (NPAs). A recent Presidential Ordinance has empowered the Reserve Bank of India (RBI) to enforce expeditious resolution of non-performing assets (NPAs) of banks.

According to experts, NPAs are the primary  concern for the banking sector. The Modi government had initiated a process for recovery of NPAs but the progress has remained painfully slow. The magnitude of the banking sector’s NPAs is estimated to be over `6.7 lakh crore, of which around `6 lakh crore is  accounted for by state-owned banks or public sector banks (PSB).

The Presidential Ordinance vs The Banking
Regulation Act

The Presidential Ordinance has empowered the Union Government to direct the RBI in areas of NPA recovery. The earlier Act did not have provisions that allowed the government to direct the RBI in matters related to NPA recovery.  The Ordinance is being seen by many as governmental interference in the traditional domain of the central bank. Political analysts are of the opinion that this move is designed to portray the Modi government as the main agency of NPA resolution. However, it remains to be seen how Parliament reacts to this Ordinance once it resumes in July. The new Ordinance has linked the Bankruptcy Code and the Banking Regulation Act. The onus of  establishing the default now lies with the government. This has led to uneasiness across industries. Industry leaders seem to be apprehensive of the government using its discretion to pick and choose default cases requiring NPA
resolution, fearing unequal treatment for borrowers and lenders. It is apprehended that certain industrial houses will bag better deals than others due to their preferential political leverage with the government.

What can be its impact?   

The Ordinance allows for closer supervision. It has allowed the RBI to constitute oversight committees for banks with NPAs. It has also set the ball rolling for some government guided RBI action on NPA recovery. Experts opine that since the government has taken it on itself to provide an expedient resolution to the NPA problem through this Ordinance, it is bound to show some tangible groundwork.

The RBI under Raghuram Rajan had taken a puritan stance in tightening the loop over sticky assets. His successor,
Urjit Patel has continued with the same pattern. According to industry sources, such orthodoxy has generated more stressed assets. However, there had been little progress in NPA recovery. Banks had been too cautious over NPA recovery. The RBI had also been less proactive. This new Ordinance can be expected to generate certain results. The government’s involvement would prod the central bank and the government banks in taking meaningful and decisive action.

Politically, it is a risk that the Modi government is taking. With the involvement of the Union Government in NPA
recovery, which is the central point of this Ordinance, the buck stops with the government. The Opposition will be keeping a keen vigil on the unfurling developments. If perceivable improvement eludes the economy, the Union Government can expect strong criticism. However, if this clicks, it will give the Modi government tremendous mileage.

Industry players are viewing this new Ordinance with  caution. A renewed involvement of the government in NPA  recovery may initiate unexpected measures which may have detrimental impact on the economy. Their primary concern for industry remains the swelling number of new stressed assets. Though this Ordinance is perceived as a political move, it must be guided by sound economic logic to attain its desired goal.

The government must understand that while NPA recovery is critical for the economy of the country, its puritan moves must not create a new set of stressed assets, which will slacken economic growth. The government must be sensitive in dealing with stressed accounts and focus on ensuring  economic growth.