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New directive on NPAs may impact banks

The Reserve Bank of India has told banks that they should, instead of resorting to interim measures like restructuring bad loans, should take up a plan to resolve all such debts within 180 days. The new directive comes in the wake of the introduction of the new bankruptcy law. If the banks fail to resolve the issue of stressed assets within this stipulated timeframe, the issue may be referred for resolution under the Insolvency and Bankruptcy Code, the central bank has told the banks. The banks fear this may increase bad loans under insolvency resolution by another 40% in six months to about Rs 5 lakh crore, which is more than half of the NPAs in the Indian banking system. According to estimates, NPAs in the system would be of the order of Rs 8.8 lakh crore. With the new directive, the NPAs would go up by Rs 1.5 lakh crore. At present, NPAs worth Rs 3.5 lakh crore are under insolvency procedures. If defaults by borrowers as a percentage of bad loans increase by 10%, capital needed for provisioning will rise by Rs 60,000 crore and this is bound to impact banks like Punjab National Bank, Bank of India and Union Bank of India and these banks would need more capital.

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