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Madras HC issues notice to RBI to respond to PIL challenging NPA norms

Posted Date : 10-Jul-2020 , 10:13:25 am | Posted By CASANSAAR print Print
The Madras High Court today issued a notice to the Reserve Bank of India (RBI), asking it to respond to a Public Interest Litigation (PIL) filed with the Court challenging the Non-Performing Assets (NPA) norms set by the banking regulator.

The notice was issued by Justice M M Sundresh and Justice R Hemalatha, confirmed the petitioner's lawyer M R Venkatesh.

The petitioner Rajaa R K had prayed to the Court to direct the banking regulator to form a committee to look at NPA classification norms and set new ones suitable to the Indian economy after considering the current circumstances.

The petitioner claims he is a Chartered Accountant who has serviced various public and private sectors, including the international ones. He argued that India's NPA problem is a technical fallacy with no national or international basis and therefore is grossly misrepresented and exaggerated at the behest of the international financial sector.

He alleged that every sector of the Indian economy has been hit by the one-size-fits-all 90-day NPA rule which is grossly unjust and cripples the entire banking system. The rule applies to all industries irrespective of their nature, without considering the facts of the Indian economy. He added that the rule is either a direct consequence or the cascading effect of the blind application of the above NPA norms, and hence requires reconsideration.

The petitioner also argued that NPA rule has had such a cascading effect that businesses become NPAs and are then subjected to the Insolvency and Bankruptcy Code (IBC). This forces the judicial system to devote its energies to resolving banking and business issues.

Consequently, the banks have reduced lending and businesses are sensitive to borrowing from banks, thus affecting the revenue of banks. This is the reason Indian banks have forced to reduce the interest on deposits, which have come down from 8 per cent in 2001 to 4 per cent in 2020, said in the petition.

Even though a bank serves social objectives through its priority sector lending, mass branch networks and employment generation, maintaining asset quality and profitability is critical for its survival and growth.

"Accumulation of huge non-performing assets in banks has assumed great importance. The extent of the problem of bad debts was first realised only in the early 1990s. NPAs represent bad loans that borrowers failed to service through their repayment obligations. This in turn affects liquidity and profitability, in addition to impacting asset quality and survival of banks. Hence, this has been considered to be the most challenging problem facing the banking and financial sectors," he argued.

The magnitude of NPAs in banks and financial institutions is about Rs 20 trillion at the gross level and Rs 10 trillion at the net level. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden they endure.

Banks and financial institutions have to take the initiative to reduce NPAs in a time-bound strategic manner. Public sector banks figure prominently in the debate not only because they dominate the banking industry, but also because they have much larger NPAs than private sector banks. This raises a concern in the industry and academics because it is generally felt that NPAs reduce the profitability of a bank, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for their management, under which several options have been provided for debt recovery and restructuring.

The petitioner stated that the current NPA norm is affecting the entire outlook to the economy, apart from impacting the country’s economic reactions in a material and substantial manner, GOI & RBI should immediately develop Indian and real data-driven NPA norms for different industries, geographies and business segments and that this should be a dynamic exercise, as in the case of GDP and other economic data.

The petitioner asked the Court to direct RBI to form a committee consisting of experts, stake-holders, bankers, economists and chartered accountants to re-look at the income-recognition and asset-classification norms currently in force and recommend a new set of norms suitable to the Indian economy after considering the experiences of the past three decades. #casansaar (Source - Business Standard)

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