Avoid window dressing bad debt by parking NPAs with ARCs: Parliament panel to banks

The Parliamentary Standing Committee on Finance, headed by BJP leader and former Minister of State  for Finance Jayant Sinha, has said that banks are using asset reconstruction companies (ARCs) to park their non-performing assets and cautioned them to not resort to such practice.  

The committee also observed that the bad debt problem in the banking sector is 'transient' in nature and should not be treated as an excuse for privatisation of public sector banks (PSBs).  

"The ARCs have become an instrument to park the non-performing assets (NPA) of banks as simply a window-dressing exercise. The committee would therefore recommend that this policy should not be misused in such a manner, as it does not really serve the purpose of resolving NPAs," the report on banking sector in the country, tabled in the Lok Sabha on Tuesday, said.

The committee also mentioned that the Reserve Bank of India's (RBI) revised framework on bad loans led to rise in such loans in 2017-18 and urged the regulator to review the guidelines.  

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"RBI's framework on resolving stressed accounts has resulted in sharp rise in bad loans in 2017-18, so much so that the bad loan provisioning has eaten into the earnings as well as the capital of the PSBs further accentuating their problem of leverage. The committee are concerned that with limited scope of improvement in earnings, at least in the near term, existing high leverages of PSBs could inhibit their lending and lending capacity, which may in turn adversely impact the growth prospects in our economy," the report said.  

"The committee hopes that the RBI will adequately factor in the prevailing scenario the need to uplift the banking operations and business while reviewing their regulatory guidelines," it added.
 
The committee also mentioned that it was satisfied with the "coherent policy response by the government" in addressing the bad loan problem in the Indian banking sector.  

"The committee are informed that the gross NPAs have reduced from Rs 8.96 lakh crore in March, 2018 to Rs 5.77 lakh crore in December, 2020. Record recovery of Rs 2.27 lakh crore has been effected since March 2018 till March 2020. Asset quality has improved significantly with the net NPA reducing from 7.97 percent in March 2018 to 2.32 percent in December 2020," it observed.  

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