DMPQ: RBI has taken several steps to deal with stressed asset problems. Discuss the steps taken by the RBI. Also comment on their success.

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Steps taken by RBI:

 

  • Establishment of private Asset Reconstruction Companies (ARCs)

Many ARCs have been created, but they have solved only a small portion of the problem, buying up only about 5 percent of total NPAs.

 

  • Strategic debt restructuring scheme: under this creditors could take over firms that were unable to pay and sell them to new owners.

 

  • Sustainable structuring of stressed assets: under this creditors, could take over firms with debt reduction up to 50% in order to restore their financial viability.

 

  • Asset quality review: to stream line the balance sheet to reflect the true picture.

 

  • Indradhanush scheme: capital infusion in PSB’s

 

 

Analysis of the scheme:

Success of the schemes are limited. There are several reasons for this:

  • The Asset Quality Review (AQR) was meant to force banks to recognise the true state of their balance sheets but bank keep on evergreening loan.
  • The RBI has encouraged creditors to
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come together in Joint Lenders Forums, where decisions can be taken by 75 percent of creditors by value and 60 percent by number. But reaching agreement in these Forums has proved difficult, because different banks have different degrees of credit exposure, capital cushions, and incentives.
  • The S4A scheme recognises that large debt reductions will be needed to restore viability in many cases. But public sector bankers are reluctant to grant write-downs, because there are no rewards for doing so.

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