NPAs: Magnitude, reasons and remedies
Magnitude of NPAs in performing assets (NPAs) and make full provisions
Public Sector Banks:
The financial position of India’s public sector banks
(PSBs) has deteriorated sharply over the past two
financial years. Many analysts fear the current
capital levels of PSBs are simply not enough to
cover the actual extent of bad loans in the system.
Latest NPA Data (August 2017)
 Public sector banks are more stressed than their
private sector counterparts with the former figuring
among the top 20 banks with the highest gross non-
performing asset (GNPA) ratios.
 IDBI Bank (with gross NPA ratio of 24.11 per cent of
gross advances) and Indian Overseas Bank (23.6 per
cent) have NPA ratios of over 20 per cent. Among
PSBs, Indian Bank has the lowest GNPA ratio of 7.21
per cent.
 YES Bank is the only bank in the sample of 38 banks
with a GNPA ratio of less than 1.
 State Bank of India (SBI) accounted for the largest
share of about 22.7 per cent (or ₹1,88,068 crore) in
the total NPAs of 38 banks (aggregating ₹8,29,338
crore) as of June-end 2017.
Fixing the NPA and associated
problems of public sector banks
{Article by Montek Singh Ahluwalia}
If we want to ensure healthy growth in the
economy, we need to ensure that the public
sector banking system can restart lending
Banking sector stress in India has emerged as one
of the critical risks which could jeopardize growth.
There is good reason to worry. Our banks are
saddled with too many non-performing loans and
credit expansion has slowed dramatically. Growth
in industrial credit (year on year) has slowed to less
than 5%. This is clearly not consistent with even
7.5% gross domestic product (GDP) growth, let
alone accelerating to 8%.
The nature of the problem
If the problem had arisen in only one or two public
sector banks, it would have been easy to handle.
The erring banks would have to recognize the non-
Ranker’s Classes
and if, as a result, their capital base shrank, they
would have to shrink lending to stay within the
capital adequacy norms. Other banks which have
been more efficient, including both public sector
banks and private banks, would expand to take up
the space.
Unfortunately, the public sector banking system as
a whole is in difficulty. The private sector banks
are in much better shape, but they account for
only a quarter of total lending, and no reasonable
expansion on their part can compensate for the
slowdown by the public sector banks.
If we want to ensure healthy growth in the
economy, we need to ensure that the public sector
banking system can restart lending. This requires
action on three fronts:
1. Recapitalization of the public sector banks to
support expanded lending,
2. cleaning up the NPAs accumulated from the
past and
3. Improving the quality of lending in future.
CAG views on Recapitalization of
PSBs
The Comptroller and Auditor General of India
(CAG) has expressed doubts over the public sector
banks' ability to raise Rs 1,10,000 crore from
markets by 2018/19 as part of their recapitalisation
exercise.
The CAG audit report on recapitalisation of public
sector banks (PSB), tabled in the Parliament said
that the banks were able to raise only Rs 7,726
crore during January 2015 and March 2017. It
has led to the doubt on the possibility of raising
the balance, amounting to over Rs 100,000 crore,
from the market by 2019.
It also stated that the rationale for distributing the
central government's capital among different PSBs
was not appropriate. Some banks, which did not
qualify for additional capital as per the decided
norms, were infused with capital; a bank was
infused with more capital than required while
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 NPAs: Magnitude, reasons and remedies
others did not receive the requisite capital to meet
their capital adequacy requirements.
It also pointed out that the PSBs' return on assets
(ROA) - a measure of their profitability - has been
consistently lower than that of the scheduled
commercial banks or SCBs (2011-16). "PSBs
account for nearly 88 per cent of the gross non-
performing assets (GNPAs) of the banking sector in
2015/16. There is a significant gap between the
book value and the market value of the PSB shares,
with most PSBs having a lower market value,
which may come in the way of the PSBs
approaching the market for additional capital
funds," the report said.
The central government, as the majority
shareholder, has infused Rs 1,18,724 crore between
2008/09 and 2016/17 in the PSBs to meet their
capital adequacy requirements or based on their
performances.
Reasons behind Bank NPAs
There are multiple reasons why NPAs are growing
in India, some that are our own making and some as
externalities:
First, global slowdown and tepid demand:
Borrowers need loans for leverage and capital; but
since earnings are slowing, customers have delayed
their payables, profits are being squeezed, exports
(dollar value) are on a decline due to weak global
demand, these borrowers simply don’t have money
to pay back. Case in point: one of the most
leveraged industry is the steel industry in India.
With steel prices going off the cliff due to dumping
by China, Korea and Japan, steel makers are left
with huge losses.
Second, it wasn’t just the US banks that had gone
berserk pre-2008: The period before the sub-prime
mortgage crises was a boom year for the world
economy. Optimism was high and credit growth
was at an all time high. Banks gave out loans
without indiscriminately without checking for
credit worthiness. This is what led to the housing
bubble and it is what is leading to our mess too.
Defaults were inevitable.
Ranker’s Classes
Third, crony capitalism: Surprise? The priority
sector for the public sector includes PPP projects.
As for the PPP projects, “contracts to the private
partners were awarded without competitive bidding
and as part of rent-seeking transactions, firms bid
aggressively at commercially unviable terms,
bidders did not have sufficient professional
expertise, and so on.”
Fourth, regulatory delays in the Infra Sector
(perhaps the most important): These projects are
highly leveraged (on an average 70%) since the
gestation period is long and uncertainty is high,
equity funding isn’t attractive to investors. These
projects are inevitably delayed due to delays in
procuring permissions, clearances and land
acquisition. This leaves promoters with high risk
leverage and no equity to bank upon. Further,
interest costs shoot up drastically by this time and
interest costs further erode profitability. Low cash
flows lead to more delays and the vicious cycle
goes on.
Fifth, wilful defaulters: These are persons who
illegally and willingly refuse to pay the banks the
amount of interest and principal. Case in
point: PNB says 904 wilful defaulters owe it Rs
10,869 crore
Sixth, unfriendly bankruptcy laws: It takes on an
average 4 years to completely exit an insolvent
company, which is extremely inefficient as per
global standards. This delays the sale of company
assets and clearing of debts to the creditors
including banks.
Resolving the NPA problem
The legacy problem of NPAs must be resolved as
quickly as possible so that the banks can focus on
resuming lending. This is easier said than done.
Some assets are best classified as loss assets and
should be written off in the books, even as efforts
are made to recover whatever value can be
recovered through liquidation. In many cases,
problem projects can be turned around through
a combination of haircuts by the banks, fresh
capital from investors and new management.
RBI has devised two schemes for this purpose.
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 NPAs: Magnitude, reasons and remedies
1. One is the strategic debt restructuring (SDR)
scheme, which allows banks to convert their
debt into equity according to a predetermined
formula, take control of the company and then
induct new management to turn it around. Action
has been initiated in several cases under this
scheme but no successful takeover has been
completed thus far. One of the problems is that
banks typically convert only enough debt into
equity to gain control but are unwilling to accept
haircuts on the remaining debt, which may be
too large for the project to be attractive to a new
investor.
2. The second RBI scheme is the Scheme for
Sustainable Structuring of Stressed Assets
(S4A), under which banks can offer existing
managements an opportunity to rehabilitate the
project by dividing the debt into two parts: a
“sustainable’’ component, which can be serviced
by the project based on some assumptions about
revenue, and the “excess’’ component which can
be converted into equity or redeemable
preference shares. Sustainable debt must be more
than 50% of the total debt. S4A leaves the
project in the hands of existing managements
and also gives the banks more flexibility in the
time taken to resolve the problem. A key issue is
how large a part of the debt is deemed to be
sustainable. Managements and banks are bound
to differ on this issue.
There is much talk of selling assets to privately
managed asset reconstruction companies
(ARCs), which can then organize the turnaround.
Another idea is that the proposed National
Infrastructure and Investment Fund (NIIF),
operating with private partners, provide both equity
and new credit to stressed infrastructure projects
going through the SDR mechanism. In both cases,
the critical issue will be whether banks are willing
to take a large enough haircut on existing debt to
make the restructured project attractive.
Understandably, bank managements will hesitate to
offer large haircuts in favour of private parties,
fearing that their bona fides may be questioned.
This problem could be solved by creating a
government-owned “bad bank” which purchases
problem loans from the banks, and concentrates on
turning the projects around, possibly with the help
of private ARCs. Bank managements will be much
Ranker’s Classes
more willing to sell assets at a discounted price to
another public sector company, which will then
undertake the task of negotiating the best deal with
potential new owners. The terms of reference of the
new entity can be sufficiently clarified to encourage
it to negotiate the best possible deal with new
private managements. It could work in partnership
with ARCs to fulfill this mandate.
Improving the quality of lending
We also need to improve the quality of lending by
public sector banks in future so that the same
problem does not arise again. That raises a number
of issues. A key issue is how to increase the
autonomy of the banks to operate as commercial
entities. One way of achieving commercial
autonomy is to privatize public sector banks but
there is no support for privatization of banks in any
political party.
The P.J. Nayak committee had suggested that if the
dilution of shareholding is not acceptable, it should
be possible to distance the government from the
managements of the banks by creating a public
sector holding company and vesting the
government’s shares in the holding company. The
newly created Banks Board Bureau is right step in
this direction.
There are two key elements in any effort to
distance government.
1. One is that the public sector banks should deal
with only one regulator, RBI, and the extensive
quasi-regulatory control exercised by the
department of financial services should be
ended. The role of the government as owner
would be performed by the holding company
and the government would deal only with the
holding company on all issues.
2. A second requirement is that public sector
banks should become board-managed
institutions, with the board responsible for all
appointments, including that of the chief
executive officer (CEO). If the shares of the
government are actually transferred to a
holding company, then decisions regarding
appointments could be taken by the board of
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 NPAs: Magnitude, reasons and remedies
the new company on the recommendation of
the board of the bank.
It is worth noting that the proposal to separate the
post of chairman and CEO is important only if the
institution becomes fully board-managed. Unless
this is done, the CEO will constantly look to the
government as the effective appointing body.
The objective of creating a genuinely commercial
environment in which public sector banks can
function and managements are made accountable
can only be achieved if the government is willing to
step back from exercising direct control. Unless
strong action is taken along these lines, we can
assume that things will continue as they have.
Various ways of recovering NPAs
There are a number of ways through which the
loans pending with NPAs are recovered. These are
mentioned below:
1.ASSET RECONSTRUCTION COMPANIES
(ARC): These specialise in recovering debt. The
banks outsource the process of dealing with NPAs
to these ARCs. They ‘sell’ the loan to the ARC at
a discount on the value of the loan, suffer the loss
equivalent to the discount, but get the risk off
their hands. The ARC now has the liberty to
collect payments, convert debt to equity (thereby
acquire decision-making power in the NPA and
take decisions to turn it to profitability), sell the
mortgage security, restructure the terms of the
loan which can include increasing the time for
repayment, a haircut (forgiving a part of the loan),
interest rate renegotiation etc. Eventually, ARCs
hold many such NPAs and further sell them in
tranches to investors (mostly HNIs), thus
securitising the NPAs. Since most banks do not
have the time or expertise to deal with NPAs
themselves, ARCs serve a useful purpose.
2.CORPORATE DEBT RESTRUCTURING
(CDR): In this case, the bank does not use an
ARC but restructures the NPA on its own.
3.STRATEGIC DEBT RESTRUCTURING
(SDR): The banks convert their debt into majority
equity in the company by diluting the other
Ranker’s Classes
shareholders of the company. Since they now are
the major shareholders, they will either change
the existing management with someone they trust
or take charge themselves in order to take
decisions that will lead the company back to
profitability. Under SDR, these banks have to
thereafter sell this equity in the company within
18 months of the exercise of the SDR option.
There have been very few takers of this scheme
since the equity in an NPA is mostly worthless.
4.BAD BANKS: it is most commonly
recommended solution to the mess. It is akin to an
ARC. They may be created in different forms: 1)
as a Special Purpose Vehicle created by the bank
itself to clean its balance sheet and protect itself
from risk 2) as a nodal institution for all public
banks; commonly referred to as the National
Asset Management Company.
These measures may all be good and keep us going
for a bit longer, but as for now, we are caught in a
deep crisis. There is no way our PSU banks can
survive without the government bailing them out
i.e. injecting taxpayers’ money as capital into them.
The government doesn’t have a choice, it cannot let
banks get insolvent since people will lose out their
savings. More and more bad loans are being written
off from the books of these banks.
In details, some of the measures are as follows:
Strategic Debt Restructuring
Mechanism and Joint
Lenders’ Forum
The Reserve Bank of India (RBI) in its circular dated
26 February 2014, on Framework for Revitalising
th
Distressed Assets in the Economy–Guidelines on
Joint Lenders’ Forum (JLF) and Corrective Action
Plan, envisaged change of management as a part of
the restructuring of stressed assets.
The Strategic Debt Restructuring (SDR) has
been introduced by RBI with a view to ensuring more
stake of promoters in reviving stressed accounts and
providing banks with enhanced capabilities for
initiating change of ownership, where necessary, in
accounts which fail to achieve the agreed critical
conditions and projected viability milestones. The
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 NPAs: Magnitude, reasons and remedies
scheme gives the right to lenders, at their discretion,
to undertake strategic debt restructuring by converting
loan dues to equity shares. This scheme is based on
the general principle of restructuring that ‘the
shareholders bear the first loss rather than the debt
holders.’
The SDR framework is also available to an Asset
Reconstruction Company, which is a member of the
JLF, undertaking SDR of a borrower company.
Features of SDR Scheme
1. Restructuring of loans subject to option to
convert entire loan into shares: At the time of
initial restructuring, the lenders are required to
incorporate, in the terms and conditions attached to
the restructured loan/s agreed with the borrower,
an option to convert the entire loan (including
unpaid interest), or part thereof, into shares in the
company in the event the borrower is not able to
achieve the viability milestones and/or adhere to
‘critical conditions’ as stipulated in the
restructuring package.
2. Decision to be taken by majority of lenders: The
decision on invoking the SDR by converting the
whole or part of the loan into equity shares should
be taken by the JLF as early as possible but within
30 days from the above review of the account.
Such decision should be approved by the majority
of the JLF members (minimum of 75% of creditors
by value and 60% of creditors by number).
3. Lenders jointly to own majority shares: Post the
conversion, all lenders under the JLF must
collectively hold 51% or more of the equity shares
issued by the company. In order to achieve the
change in ownership, the lenders under the JLF
should collectively become the majority
shareholder by conversion of their dues from the
borrower into equity.
4. New loan agreements to provide for SDR: RBI
has directed that henceforth, banks should include
necessary covenants in all loan agreements,
including restructuring, supported by necessary
approvals/authorisations (including the special
resolution by the shareholders) from the borrower
company, as required under extant
laws/regulations, to enable invocation of SDR in
applicable cases.
5. Time limit for completion of SDR and
conversion of loan to equity: JLF can have
flexibility in the time taken for completion of
individual activities up to the conversion of debt
Ranker’s Classes
into equity in favour of lenders (i.e. up to 210 days
from the review of achievement of
milestones/critical conditions) as per the SDR
package approved by JLF.
6. Professional management to run the affairs of
the company: Banks are required to explore the
possibility of preparing a panel of management
firms/individuals having expertise in running
firms/companies who could be considered for
managing the companies till ownership is
transferred to the new promoters. In no case should
the current management be allowed to continue
without the representatives of banks on the Board
of the company and without supervision by an
entity/person appointed by the banks.
Joint Lender’s Forum
As per RBI directive: Where the principal or
interest payment of an account is overdue between
61-90 days and if the aggregate exposure (AE) of
lenders in that account is Rs 1000 million and
above, the lenders should mandatorily form a
committee to be called Joint Lenders’ Forum (JLF) .
Lenders also have the option of forming a JLF even
when the AE in an account is less
than Rs.1000 million and/or when the principal or
interest payment is overdue for a period less than 61-
90 days.
The lenders are required to formulate and sign an
Agreement (which may be called JLF agreement)
incorporating the broad rules for the functioning of
the JLF. The JLF should explore the possibility of
the borrower setting right the irregularities/
weaknesses in the account.
Scheme for Sustainable
Structuring of Stressed Assets
(S4A)
In a bid to further strengthen the lenders’ ability to
deal with stressed assets and put real assets back on
track, the Reserve Bank of India, in June 2016,
unveiled yet another scheme — Scheme for
Sustainable Structuring of Stressed Assets (S4A) —
for “reworking the financial structure” of big
corporate entities “facing genuine difficulties”.
RBI unveiled this new scheme to tackle bad loans
of big firms. The scheme will be considered if the
aggregate exposure (including accrued interest) of
all institutional lenders in the account is more than
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 NPAs: Magnitude, reasons and remedies
Rs 500 crore (including rupee loans, foreign
currency loans and external commercial
borrowings).
The scheme will have a sustainable debt part and a
part which will be converted into equity or
redeemable cumulative optionally convertible
preference shares. The S4A envisages
determination of the sustainable debt level for a
stressed borrower, and bifurcation of the
outstanding debt into sustainable debt and
equity/quasi-equity instruments which are expected
to provide upside to the lenders when the borrower
turns around.
Mission Indradhanush – 7 key
Reforms of Public Sector Banks
Mission Indradhanush is announced to get
the public sector banks out of the deep trough. The
mission aimed to revamp the functioning of public
sector banks. The mission was named Indradhanush
to reflect the seven elements that comprise the
mission.
Mission Indradhanush aimed to revamp
the functioning of public sector banks so
that PSBs can compete with the Private Sector
Banks. The mission is a brainchild of PJ Nayak
committee. It is launched by Ministry of
Finance under the Department of Financial
Services. The mission is regarded as one of the big
steps after the nationalisation of banks in 1970s.
The mission includes the seven key
reforms of:
1. Appointments,
2. Board of bureau,
3. Capitalization,
4. De-stressing,
5. Empowerment,
6. Framework of accountability and
7. Governance reforms.
The mission is also known as A2G for PS Banks.
In detail:
Ranker’s Classes
1. Appointments: The Government decided
to separate the post of Chairman and Managing
Director by prescribing that in the subsequent
vacancies to be filled up the CEO will get the
designation of MD & CEO and there would be
another person who would be appointed as non-
Executive Chairman of PSBs. Under the new
process of selection for MD & CEO, Even Private
sector candidates were also allowed to apply for the
position of MD & CEO of the five top banks i.e.
Punjab National Bank, Bank of Baroda, Bank of
India, IDBI Bank and Canara Bank.
2. Bank Board Bureau (BBB): The BBB will be a
body of eminent professionals and officials, which
will replace the Appointments Board for
appointment of Whole-time Directors as well as
non-Executive Chairman of PSBs. The BBB will
comprise of a Chairman and six more members of
which three will be officials and three experts (of
which two would necessarily be from the banking
sector).
3.Capitalization of public sector banks.
4.De-stressing: The government will concentrate
on distressing the banks’ bad loans. An
institutional mechanism will be brought to manage
NPAs. Under the plan, asset reconstruction
companies will also be strengthened to deal with
bad loan situation. Moreover, the government has
also resolved to set up a Bank Investment
Committee, which will act as a holding company
for shares on behalf of the government.
5. Empowerment: The government will strive to
make it easier for PSBs to hire. The government is
looking at introducing Employee Stock
Ownership Plan (ESOPs) for the PSU bank
managements. The Government has issued a
circular that there will be no interference from
Government and Banks are encouraged to take their
decision independently keeping the commercial
interest of the organisation in mind.
6. Framework of Accountability: The government
also announced a new framework of key
performance indicators for state-run lenders to
boost efficiency in functioning while assuring them
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 NPAs: Magnitude, reasons and remedies
of independence in decision making on purely
commercial considerations.
7. Reforms: The process of governance reforms
started with “Gyan Sangam” – a conclave of PSBs
and FIs.
The loopholes of Indradhanush Mission:
 One, there is no reference at all
to disinvestment, in any way, shape or form.
 Regarding capital infusion, whether the govt.
will infuse money to the PSBs according to their
performance is not mentioned. Rather than
giving capital to all the PSBs, govt. should have
given it according to the performance of the
PSBs in a year.
 About 80,000 employees are expected to retire in
coming two years. And some more are expected
to retire in coming years. So, there is an
opportunity for govt. to restructure banks, but
such a measure is not mentioned.
Indradhanush 2.0: Government plans to
come out with 'Indradhanush 2.0', a comprehensive
plan for recapitalisation of public sector lenders,
with a view to make sure they remain solvent and
fully comply with the global capital
adequacy norms, Basel-III. 'Indradhanush 2.0' will
be finalised after completion of the Asset Quality
Review (AQR)
Twin Balance Sheet Problem
(TBS)
TBS deals with two balance sheet problems. One
with Indian companies and the other with Indian
Banks. Thus, TBS is two two-fold problem for
Indian economy which deals with:
1. Overleveraged companies – Debt accumulation
on companies is very high and thus they are
unable to pay interest payments on loans. Note:
40% of corporate debt is owed by companies
who are not earning enough to pay back their
interest payments. In technical terms, this means
Ranker’s Classes
that they have an interest coverage ratio less
than 1.
2. Bad-loan-encumbered-banks – it refers to
Non Performing Assets in balance sheets of
banks. It is very high in case of public sector
banks comparing private sector. As companies
fail to pay back principal or interest, banks are
also in trouble. ( quote latest data given on page
one above)
Steps taken to address the problem of TBS : See
separate topic on steps taken to address problem of
NPAs in India.
Why the India did did not solve the TBS
problem?
 Loss recognition: Banks do not recognise
stressed assets and continue giving loans. They
are reluctant to conduct the asset quality review
for their assets.
 Coordination problems: Difficulty in deciding
compensation by different banks on Joint
Lenders Forums which has not achieved much
success.
 Court cases: Public Sector Banks are reluctant
to write down loans as bank managers are afraid
of accusation of favouritism.
 Lack of Capital: Indradhanush Scheme
promised to infuse Rs 70,000 crore into Public
Sector Banks by 2018-19. But this amount is not
enough and banks need atleast Rs 1.8 lakh crore
more.
What is the solution to the Twin Balance Sheet
Problem?
India has till now pursued a decentralised approach
where individual banks have taken decisions on its
own to resolve NPAs. This approach has not
resolved the problem. Now, time has come to create
a centralised agency called Public Sector Asset
Rehabilitation Agency (PARA). The Public Sector
Asset Rehabilitation Agency (PARA) colloquially
called “Bad Bank” is a proposed agency to assume
the Non-Performing Assets (NPA) of public sector
banks in India and to deal with the recovery of the
bad loans. This agency has been proposed in
Economic Survey 2016-17.
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 NPAs: Magnitude, reasons and remedies
Why does India need a Public Sector Asset
Rehabilitation Agency (PARA)?
 The argument for PARA is made on the grounds
that companies have been grappling with
deteriorating cash flows, which makes loan
repayment tougher at a time when their interest
obligation is already mounting. While companies
have sold assets, it was to "buy time" as they
continue to "haemorrhage".
 It will be able to resolve not only NPA problems
but also bad debts of the companies, thus
resolving TBS Problem.
 The centralised agency would help in fixing the
problem faster and the decision will be taken
swiftly.
 It could solve the coordination problem since
debts would be centralised in one agency.
 The stressed debt is heavily concentrated in large
companies and such bigger cases can be resolved
by an independent agency.
 Failure of Banks and private ARCs in resolving
NPA problem till now.
 An international experience like of East Asian
countries has shown that centralised agency can
resolve Twin Bet Problem.
Working of PARA
 PARA would purchase loans from banks and
then work them by different ways like
converting debt to equity and selling the stakes
in the auction.
 After taking off the loans from Public Sector
Banks, the government would recapitalize them.
Similarly, once the financial viability of the
over-indebted enterprises is restored, they will
be able to focus on their operations, rather than
their finances and will be able to consider new
investments.
Funding of PARA
 RBI may transfer some of the government
securities to PARA.
 Government funding in the form of securities.
 Rest of the money may come from capital
markets.
Ranker’s Classes
Financial Resolution and Deposit
Insurance Bill, 2017) to deal with
bankruptcy in financial sector
 The Bill provides for setting up the Resolution
Corporation to deal with bankruptcy in banks,
insurance companies and financial entities. It
will also result in the repealing of the Deposit
Insurance and Credit Guarantee Corporation Act,
1961, to transfer the deposit insurance powers
and responsibilities to the Resolution
Corporation.
 It aims to instill discipline in financial service
providers in the event of a financial crisis by
limiting the use of public money to bail out
distressed entities.
 The Resolution Corporation would ensure the
stability and resilience of the financial system,
protecting the consumers of covered obligations
up to a reasonable limit and public funds to the
extent possible.
 The government has recently enacted the
Insolvency and Bankruptcy Code, 2016, for the
insolvency resolution of non- financial entities.
 The proposed Bill complements the Code by
providing a resolution framework for the
financial sector. Once implemented, this Bill
together with the Code will provide a
comprehensive resolution framework for the
economy.
 The Bill aims to strengthen and streamline the
current framework of deposit insurance for the
benefit of a number of retail depositors. Further,
this Bill seeks to cut down the time and costs
involved in resolving the problem of the
distressed entities.
Bankruptcy proceedings against 12
Borrowers by RBI
 In June 2017 Reserve Bank of India had
identified 12 accounts, which account for 25% of
non-performing assets of the Indian banking
system for immediate resolution under the
Insolvency and Bankruptcy Code (IBC).
 Gross bad debt in the banking system as on
March was Rs 7.11 lakh crore, which means the
12 accounts contribute to about Rs 1.78 lakh
crore.
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 NPAs: Magnitude, reasons and remedies
 The government had recently amended the RBI
Act, which gave powers to the central bank to
direct banks to take punitive action against
individual accounts under IBC.
 Banks can start bankruptcy proceedings against
defaulters by filing a petition with the National
Company Law Tribunal.
Prompt Corrective Action (PCA)
RBI has issued a policy action guideline (first in
May 2014 and revised effective from April 1, 2017)
in the form of Prompt Corrective Action (PCA)
Framework if a commercial bank’s financial
condition worsens below a mark.
The PCA framework specifies the trigger
points or the level in which the RBI will intervene
with corrective action. This trigger points are
expressed in terms of parameters for the banks. The
parameters that invite corrective action from the
central bank are:
1. Capital to Risk weighted Asset Ratio (CRAR)
2. Net Non-Performing Assets (NPA) and
3. Return on Assets (RoA)
4. Leverage ratio
When these parameters reach the set trigger
points for a bank (like CRAR of 9%, 6%, 3%), the
RBI will initiate certain structured and discretionary
actions for the bank. As per the revised
framework by the RBI, in April 2017, capital,
asset quality and profitability continue to be the
key areas for monitoring. Along with this,
leverage of banks also will be monitored.
The some of the structured and discretionary
actions that could be taken by the Reserve Bank
are:
 recapitalization,
 restrictions on borrowing from inter-bank
market
 merge/amalgamate/liquidate the bank
 impose moratorium on the bank ETC
The major trigger points in the original format
were:
CRAR
(i) CRAR less than 9%, but equal or more than 6%
(ii) CRAR less than 6%, but equal or more than 3%
(iii) CRAR less than 3%
NPAs
(i) Net NPAs over 10% but less than 15%
Ranker’s Classes
(ii) Net NPAs 15% and above
ROA below 0.25%
The PCA framework is applicable only to
commercial banks and not extended to co-operative
banks, non-banking financial companies (NBFCs)
and FMIs.
Additional topic
10 major issues with Public Sector
Banks
1. Overhang of bad debt - they have lent to
corporates who had already over-borrowerd.
Part of this was because the government nudged
them to in order to kick start the economy. But
the global crash in commodity prices mean that
there is no demand and companies do not have
cash flow to repay.
2. Absence of retail: Biggest growth in loans is
coming from retail segment. PSU banks are
used to having borrowers coming to them. They
do not have the infrastructure to send marketing
people to individuals who are too busy to spend
the entire day following up on their loan.
3. High wage cost: PSU Bank salaries are low at
CEO and top management level. But
probationary officers salaries are lower than
what `executives' at new private banks get.
Actually, the front office jobs have become so
much centralised and automated that banks do
not need that many highly qualified people at
branch level. The second cause of high cost is
the index-linked pension that the bank pays
retired employees. With life expectancy going
up pension provisions will also shoot.
4. Lack of corporate governance: Promotions in
banks have typically been seniority based. This
meant many people are in senior positions over
others. Government has also been choosing
from small pool of people. It is never wise to
have people taking decisions on thousands of
crores earning only in thousands. Board
members are neither compensated well nor
chosen wisely. Also because most CEOs take
charge in their late 50s they have a short-term
vision and there is no continuity.
5. Technology challenges: PSU banks have made
huge investments in branch infrastructure. But
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 NPAs: Magnitude, reasons and remedies

banking is slowly moving to mobile apps and department of telecom) did a great job in
online. PSU banks have not formed a strategy connecting the country. But in new technology,
on redeploying people. such as mobile phones the private sector is racing
6. Capital: The largest investors in India are ahead.
foreign institutional investors. Both HDFC To understand what can be done to improve the
Bank and ICICI Bank have more than 70% state of Public Sector Banks, you should read the
foreign investors. Public sector banks have to recommendation of the PJ Nayak committee.
compulsorily be owned by the government this
means that they can raise capital largely from
Indian shareholders.
7. HR Policies: Private banks reward successful
employees through individual incentives esops
etc. Public sector banks because of their wage
agreements with the employee unions cannot
discriminate while compensating employees.
This makes it very difficult to reward those who
are successful in marketing.
8. Social burden: A disproportionate part of the
burden of government's social schemes falls on
public sector banks. Most of the Jan Dhan
Yojana accounts, collateral-free education
loans, cheap farm loans are provided by public
sector banks. These are a drain on their
resources.
9. Image: Today thanks to core banking most psu
banks are able to provide almost the same
services that a private bank provides. However,
because of their image as government
departments and lack of communication at
branch levels the adoption of alternate channels
in public sector banks is very low. This makes
them less efficient as branches are more
expensive.
10. Constraints of government
ownership: Government ownership makes it
difficult for officers to take tough decisions. For
instance if a manager decides to sell a
hypothecated machinery at a discounted price
he might be questioned for it if the price rose
later. So many find it less riskier not to take any
action. There is also the requirement of
assigning tenders to lowest bidder (L1) which in
turn impacts quality and encourages people who
know how to work the system.
The Public Sector Banks have done a great job
of reaching banking to the interiors, providing loans
to farmers and financing Indian industry. What has
happened is that banking has got transformed and
private bankers are moving faster. It is a bit like
what happened in telecom where BSNL (erstwhile

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