RBI to become the only regulator to frame which loan is NPA

The rise in non-performing assets of PSU banks in the past fiscal has given rise to many doubts. The most pertinent one is whether bank's inability to recover bad loans is as real and projected by them. And if so, whether the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI Act), 2002 has completely failed. For the uninitiated the said act was meant to be a pariah for banks burdened with NPAs. The act allows banks and financial institutions to auction borrowers' properties if they fail to repay their loans. It thus enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery.

However, that has certainly not helped over the past year. The reason being an amendment to the SARFAESI Act in 2005 allowed different regulators to have different loan classification for NPAs. And that resulted in delayed acknowledgement that the loans are indeed bad. However a recent Gujarat High court judgment has repealed the amendment. It has in fact allowed RBI to become the only regulator to frame policies on NPAs. We believe that although belated, this judgment will certainly allow the central bank to control the NPA malady in the sector.