What is it?
The Public Sector Asset Rehabilitation Agency or PARA will be an independent entity that will identify the largest and most vexatious NPA accounts held by banks, and then buy these out from them. By consolidating problem accounts across banks, the PARA is expected to solve two problems.
One, it can effect speedier settlements with borrowers by cutting out individual banks. Two, as a single large lender, it can drive a better bargain with borrowers and take more stringent enforcement action against them.
PARA is expected to raise capital for its buyouts by issuing government securities, tapping the capital markets or receiving a capital infusion from the RBI.
In short, PARA is just a new version of the ‘bad bank’ idea that has been doing the rounds for some time now.
Why is it important?
The stockpile of bad loans has had several ill-effects on the economy at large.
One, with 16.6 per cent of their loan book tied up in stressed assets (bad and doubtful loans), banks have been fighting shy of new lending. This is constraining new investments in projects that can power the economy. Even if the Government were to infuse fresh capital into public sector banks, (Rs 1.8 Lakh cr are required) there’s worry that this may go to write off older bad loans rather than kick-start lending.
Two, public sector banks, which hold over 70 per cent of all deposits, are the worst hit by the bad loan problem. For some of these banks, the provisions for bad loans have already overtaken operating profits, leaving them short of capital to sustain operations.
Three, high NPAs force banks to keep their lending rates high to boost their profits.
Finally, with 40 per cent of the loans stuck with companies who simply do not earn enough profits to service them, simply waiting for the problem to solve itself will not work. This is already telling on private sector investments and GDP growth.
PARA is expected solve all these problems at one stroke, by relieving the banks of their NPAs and expediting ways for the corporate borrowers to settle their debts.
Why should I care?
As a depositor, PARA will mean greater safety of your deposits with the tottering public sector banks. As a taxpayer, it is your money that the Centre uses to recapitalise public sector banks when they indulge in big ticket write-offs. By moving large problem accounts to PARA, the government can separate the capital infusion exercise from the clean-up exercise. PARA can raise money from institutional investors rather than looking only to the Government.
As an honest borrower, bad loans weighing on bank balance sheets mean higher interest costs and slower transmission of RBI rate cuts. Once stressed assets are sold to PARA, the RBI can lean harder on banks to pass on its rate cuts.
What other steps RBI has taken before PARA to take care of bad loan problem?
1- 5/25 Scheme
2- S4A scheme
3- Banks Board Bureau