IELTS Reading Topic 8

The total stress in the Indian banking system is about Rs. 14 lakh crore.

(Read the passage given below)

The total stress in the Indian banking system is about Rs. 14 lakh crore. In other words, this is the amount for which loans have been given to industry and for which there is now no certainty of repayment.

The figure is set to increase with the banking regulator recently raising a red flag over the indebtedness of the telecom sector and asking banks to increase standard asset provisioning. This means that even if the account is not a non-performing asset (NPA), banks have to set aside higher capital. In fact, the Reserve Bank of India (RBI) has asked banks to identify stressed sectors and to make higher provisions to prepare for bad days ahead.

Bad loans in the Indian banking system have almost doubled in the past year. According to Reserve Bank of India data, gross NPA, as a percentage of gross advances, went up to 9.1% in September 2016 from 5.1% in September 2015. In the same period, stressed assets (which is gross NPA plus standard restructured advances and write-offs) moved up from 11.3% to 12.3%. Some estimates suggested it had doubled since 2013. Public sector banks share a disproportionate burden of this stress. Stressed assets in some public sector banks have approached or even exceeded 20%.

A PARA solution

Amid the sharp rise in NPA, talks of setting up a ‘bad’ bank have been gaining momentum. The government and the RBI are drawing up strategies on how to operationlise such a scheme. The economic survey of 2016-17 pointed out the twin balance sheet problem — stressed companies on one hand and NPA-laden banks on the other — and advocated a centralised Public Sector Asset Rehabilitation Agency (PARA) be established to deal with the bad loans problem.

“Private Asset Reconstruction Companies (ARCs) haven’t proved any more successful than banks in resolving bad debts,” the economic survey had said while proposing the ‘bad’ bank. “But international experience shows that a professionally-run central agency with government backing — while not without its own difficulties — can overcome the difficulties that have impeded progress,” it added.

One challenge private sector ARCs face is that of capital. None of the entities till now has been allowed to tap the capital market for raising funds. Kotak Mahindra Bank, which recently took its board’s approval to raise Rs. 5,300 crore equity said the bank also wanted to capitalise on opportunities in acquisition and resolution of stressed assets in the banking sector including participation in a ‘bad’ bank. Kotak Mahindra Prime and Kotak Mahindra Investments, companies in the Kotak Mahindra Group are sponsors of the asset reconstruction company Phoenix and together own 49% stake in it.

“The ARCs are badly capitalised. We see significant opportunity for Kotak in this,” Mr. Kotak said adding the country would need 2-3 well-capitalised ‘bad’ banks.
Some central bank as well as government officials also admitted capital was the biggest challenge in setting up a ‘bad’ bank. “At least Rs. 25,000 to Rs. 30,000 crore of capital will be required to set up a bad bank in the initial stages. Where will the money come from?” asked a senior central bank official.

Two Models

RBI deputy governor Viral Acharya recently suggested two models to solve the problem of stressed assets. The first, Private Asset Management Company (PAMC), is said to be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness. Some of the sectors which this model could address metals are telecom and textiles.

In this model, each resolution plan would get vetted and rated by at least two credit rating agencies to assess the financial health and in terms of timeline, the banking sector may be asked to resolve and restructure, say, its 50 largest stressed exposures in these sectors, by December 31, 2017, the deputy governor had proposed.

The second model is the National Asset Management Company (NAMC), which would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term. Mr. Acharya cited the example of the power sector, where projects have been created to deliver aggregate capacity that is beyond the estimated peak utilisation any time soon.
(Source: The Hindu Published on Wednesday, April 26, 2017)

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IELTS Reading Quiz Set 8

IELTS Multiple Choice Questions - Powered By Cosmo Consultants

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1 / 5

According to passage, what is the possible reason behind the increase of the total stress in the Indian banking system?

2 / 5

Consider the following statements: 
1. Bad loans in the Indian banking system have almost doubled in the past year.
2. Stressed assets in some public sector banks have approached or even exceeded 20%.
Which of the following statements given above is/are correct?

3 / 5

Why is the economic survey of 2016-17 advocated for a centralised Public Sector Asset Rehabilitation Agency (PARA)? 

4 / 5

What is the biggest challenge in setting up of a ‘bad’ bank? 

5 / 5

Which model is suitable for stressed assets in Power Sector? 

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