Public Sector Asset Rehabilitation Agency in News

2019 ias preliminary exam test series

The RBI has come up with idea of PARA in the latest Economic Survey 2017.

The Public Sector Asset Rehabilitation Agency or PARA will be an independent entity that will identify the largest and most vexatious NPA accounts held by banks, and then buy these out from them.

By consolidating problem accounts across banks, the PARA is expected to solve two problems. One, it can effect speedier settlements with borrowers by cutting out individual banks. Two, as a single large lender, it can drive a better bargain with borrowers and take more stringent enforcement action against them.

PARA is expected to raise capital for its buyouts by issuing government securities, tapping the capital markets or receiving a capital infusion from the RBI.

Reason:

The stockpile of bad loans has had several ill-effects on the economy at large. One, with 16.6 per cent of their loan book tied up in stressed assets (bad and doubtful loans), banks have been fighting shy of new lending.

Two, public sector banks, which hold over 70 per cent of all deposits, are the worst hit by the bad loan problem. For some of these banks, the provisions for bad loans have already overtaken operating profits, leaving them short of capital to sustain operations.

Three, high NPAs force banks to keep their lending rates high to boost their profits.

Finally, with 40 per cent of the loans stuck with companies who simply do not earn enough profits to service them, simply waiting for the problem to solve itself will not work. This is already telling on private sector investments and GDP growth.

PARA is expected solve all these problems at one stroke, by relieving the banks of their NPAs and expediting ways for the corporate borrowers to settle their debts.

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