Asset quality of banks affects the entire domestic economy as higher proportion of bad assets may have undesired spill over effects. As you may be aware, banks in India have been facing a trouble in recovering loans, especially from corporate entities. In a press conference held after the Central Board meeting of Reserve Bank of India (RBI) concluded lately, the RBI Governor cautioned banks that the worst on the Non-Performing Asset (NPA) front may not be over yet. Gross NPAs went up to 4.45% in March 2015 as against 4.1% recorded in March 2014. Nevertheless, banks are expected to get leverage soon; here's why...

The Benami Transactions (Prohibition) Amendment Bill, which is pending for parliamentary approvals, if gets enacted, would provide banks some legal course against wilful defaulters. It has been observed that some corporate as well as other borrowers divert borrowed funds to creating benami properties.

A benami property is defined as, "where a property is transferred to, or is held by, a person for a consideration provided, or paid by, another person." Moreover, property refers to 'any' property which is the subject matter of a benami transaction.

What may happen if the Bill goes through?
Under the present system banks can only have a claim on properties that have been held as collaterals. But under the proposed Bill, there are provisions that might empower banks to claim benami properties of defaulting borrowers.

Banks would have to approach the initiating officer who may then pass on the order for provisional attachment of alleged benami properties. Within 15 days from the attachment, initiating officer would make a statement of the case and forward it to the adjudicating authority. Then, the authority will within 30 days, will ask for documents, particulars or evidence from banks concerned, or any other interested party. While the Bill provides for the exact quantum of punishment and penalty for benami property beneficiaries, it does not give exact details of how the proceeds from the property are to be shared by banks or other claimants. Nevertheless, this appears to be decided on a case-to-case basis.

PersonalFN believes if the Government manages to win over the support of opposition parties, the Bill, would:
 

• Reduce the number of benami transactions
• Keep check on siphoning of borrowed money from banks to benami properties
• Help banks to recover money from willful defaulters
• Help reduce NPAs of banks
   

Introduction of strong laws and their effective implementation may truly help banks keep a check on escalating NPAs, especially in the corporate portfolios. Although, economic slowdown and higher interest rates are often blamed for rising NPAs, lapse in credit assessments is also one of the reasons. Therefore, in addition to strong laws, sound risk management processes may be crucial to dealing effectively with bad loans.

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