Recap makes banks healthier: Arun Jaitley

Phot Credit: REUTERS/Anindito Mukherjee

What exactly is Non-Performing Asset?
A nonperforming asset is a debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.
For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
Situation in India

Earlier the government and the RBI asked banks to provide for non-performing assets (NPA), but banks did not have enough capital to write off NPA, not that they did not know which company was a NPA. Now by providing capital, banks will have the ability to write off NPAs. The way this entire recap bond has been structured as per the global definition it becomes part of fiscal deficit of this year.
The finance ministry on Tuesday announced that it is planning to give around $32 billion to the banks.

India’s most valuable lender HDFC Bank on Wednesday clarified that the Reserve Bank of India has asked the bank to classify one of its accounts as a non-performing asset. The bank on Tuesday had said that it was negotiating with the central bank on some observations related to the implementation of a flexible structuring scheme in a power and steel account.  Finance Minister Arun Jaitley has said the government, faced with a “catch-22 situation” over the issue of non-performing assets, is working on a plan to rebuild the capacity of India’s banking sector so as to support growth.

Two things to look out for: Will India act to reduce government control over banks, and will it be clear and transparent about how it is spending its money?

Finance Minister announces 2.11 lakh crore to re-cap banks

Photo Credit: REUTERS/Danish Ismail

Source: Indian Express


Edited by: Shuiab