Ordinance on NPAs to Tackle Bad Loans Will be Crucial: RBI Official

MUMBAI: Both the Reserve Bank of India (RBI) and the Ministry of Finance, Government of India have been working to tackle the problem of mounting bad loans. Ordinance on non-performing assets (NPAs) which is approved by President Pranab Mukherjee will define the way forward in this regard, a top RBI official said.

“The ordinance has just received President’s assent, I am sure it will be a very interesting piece of legislation,” said Mr Sudarshan Sen, executive director, RBI while inaugurating an ASSOCHAM Global Factoring Summit.

“We will make all efforts to resolve the NPA problem, we are making efforts and we will continue to do so, this is one more chapter,” said Mr Sen.

“But this is a continuing process, nothing happens overnight, these are hard problems, these are difficult problems but we are determined to solve them,” he added.

Talking about the factoring business, the RBI official said that despite the enactment of Factoring Regulation Act in 2011, it still has not taken off as was envisaged or desired.

He said that post the enactment of the Act, six NBFC factors had registered with the RBI of which three are systemically important.

He also informed that size of the sector at the last count is approximately Rs 3,200 crore which has declined over previous year due to various factors.

“What is of concern also is the high NPAs in the sector with 29 per cent gross NPA ratio and the net NPA ratio at 11 per cent, this is a little alarming as is also the negative ROA (return on assets) and ROE (return on equity), so these areas need to be addressed,” said Mr Sen.

He said that one of the impediments in the healthy functioning of factors was the non-availability of recourse under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI). However, last year the benefit of enforcement of security interest was extended to all systemically important NBFCs including NBFC factors.

“This is expected to improve recovery by factors and reduce their NPA levels,” he added.

On the RBI’s Trade Receivables Discounting System (TReDS), Mr Sen said that it will not only facilitate discounting of invoices and bills of exchange but it will also greatly facilitate the factoring business.

“Though it has just about started now and will gain momentum, but it would be very desirable if some of the large customers of MSMEs (micro, small and medium enterprises) especially in the public sector take the lead in registering their dues on the TReDS system, this will really kick-start the system,” he added.

“Besides it will also be a huge source of information for tapping potential clients,” further said the RBI official.

Talking about the issue of allowing factors to identify wilful defaulters, he said, “This issue is pretty hot and is right now under the consideration of Supreme Court regarding disclosures and other, we are awaiting the judgement and once that is there, we will take a look at it.”

Further, on the issue that with implementation of Insolvency and Bankruptcy Code, what will be the status of a factor i.e. will it be a financial creditor or operational creditor, Mr Sen said, “Their definitions might suggest that factor would be treated as an operational creditor but this could have some adverse implications for factors. We have recently received this and we are examining it.”