THE GIST of Editorial for UPSC Exams : 13 January 2020 (NPA crisis: Prevention is the cure (The Hindu))

NPA crisis: Prevention is the cure (The Hindu)

Mains Paper 3: Economy
Prelims level : Insolvency and Bankruptcy Code
Mains level : Significance of the IBC


  • At the end of September 2019, the GNPA was at 9.1 per cent of banks’ loans and other outstandings.

Significance of the IBC:

  • Credit for this has been given to the Insolvency and Bankruptcy Code (IBC).
  • While it has indeed put the fear of God into defaulting company promoters (who don’t want to lose the controlling interest in the company to the highest bidder), for banks it means huge sacrifices, euphemistically and flippantly described as ‘haircuts’, in the range of 50-60 per cent.

‘Cleaning up’ the balance sheet:

  • Balance sheets of banks look squeaky clean when bad debts (or NPAs) are brushed under the carpet after the IBC resolution process is over. But then, banishing the problem is not the same as finding a solution.
  • The IBC resolution process, to be sure, is better than the earlier state of affairs when banks would wait helplessly for years wringing their hands in desperation. In the end, they may recover a small portion, which is better than nothing.
  • While the grim prospect of losing control of the company is bound to halt the rampaging promoters in their tracks, the economic downturn and genuine business issues often come in the way of loan and interest repayment.
  • Some fly-by-night, thick-skinned operators do not really lose sleep over losing control of their companies.

Asset-liability mismatch:

  • Banks have also been guilty of courting trouble by lending to long-gestation infrastructure projects. Asset-liability mismatch (ALM) is a banker’s nightmare.
  • If a bank has accepted fixed deposits of ₹1,000 crore for three years, it must earmark this for loans of shorter maturities.
  • Otherwise it may find itself in a fix, with depositors demanding their money back after three years.
  • It is to avoid ALM that take-out financing emerged on the scene. Like a relay race, with bank A passes the baton to bank B after the first three years, bank B to bank C after the next three years and so on, so that no bank faces the pitfalls of an ALM.
  • But in India, take-out financing is extremely inadequate, with specialised infrastructure financing agencies like IIFCL passing the buck to the banks instead of undertaking loan appraisal upfront, and then bringing the banks into picture when things have stabilised.

Way ahead:

  • Banks which read the riot act to mortgagers and gold-loan clients have, alas, no immediate and sure-shot recourse when it comes to industrial loans.
  • They do compensate for this extra risk by charging higher interests, but when the loans go sour, interest too stops flowing in.
  • The government and the RBI must celebrate only when they succeed in preventing NPAs from building up in the first place, rather than after brushing them under a carpet.

    Online Coaching for UPSC PRE Exam

    General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the new Wetland Conservation Rules, consider the following statements:
1. The rules prohibit setting up or expansion of industries and disposal of construction and demolition waste within the wetlands.
2. A wetland is a land area that is saturated with water permanently and not seasonally.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A
Mains Questions:
Q.1) What is the Insolvency and Bankruptcy Code? What are the limitations of it?

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