Loan repayment: Banks advised against “merciless” steps, says Finance Minister 2023

Loan repayment: Banks advised against “merciless” steps, says Finance Minister

Sitharaman recently stated that momentum had to be maintained and that both the balance sheets of the banks and the corporate finances were in a favourable situation.

Finance Minister Nirmala Sitharaman stated on Monday that public and private sector banks have been urged to avoid overly strict when guaranteeing loan repayment, easing borrowers’ concerns.

She spoke up during the Lok Sabha’s Question Hour and stated, “I have heard concerns about how ruthlessly certain banks have pursued loan repayments. All public and private banks have been told by the government that severe measures should not be utilised when it comes to loan repayment and that they should handle the issue with humanity and empathy.

Dhairyasheel Mane, a Shiv Sena MP from Hatkanangle in Maharashtra led by Eknath Shinde, said that certain banks were charging “exorbitant” interest rates because they were aggressive in debt collection. The government doesn’t interfere with the banks’ choice about the interest rates at which banks offer loans, according to Minister of State for Finance Bhagwat Kishanrao Karad.

Sitharaman recently stated that momentum had to be maintained and that both the balance sheets of the banks and the corporate finances were in a favourable situation. “They (banks) are looking forward to boosting core banking business. She added that India is in a dual balance sheet advantage position, according to the Reserve Bank’s description of the situation.

The government and the Reserve Bank of India have taken several actions in recent years to improve the asset quality of public sector banks (PSBs). As of March 2023, their gross and net NPAs have significantly improved and are currently at 4.97% and 1.24%, respectively. In 2022-23, PSBs reported an aggregate net profit of Rs. 1.05 trillion, which is a record high and nearly three times the amount reported in 2013-14.

The recovery in the banking industry following the crisis in the last years of the UPA was credited to actions taken by Prime Minister Narendra Modi’s administration, including merging local banks into larger banks and strengthening PSB management.

“Banks were shielded from losses by Acts like the Bankruptcy Code. Furthermore, he added that the banks renowned for losses and NPAs are now being touted for their record profit at a virtual Rozgar Mela, tightening the noose against individuals who robbed government property by attaching their property.

In the latest financial discourse, the Finance Minister has called upon banks to exercise patience and refrain from using severe measures while dealing with loan defaults, marking a significant shift in the narrative of debt recovery strategies. The advice comes in the wake of ongoing economic recovery efforts following the financial strain induced by a series of global crises.

In their address, the Minister has conveyed that while the process of loan recovery is crucial for the stability of the banking sector, it is imperative that the recovery strategies respect the hardships faced by borrowers, particularly in these challenging economic times. The Minister strongly advised against what was termed as “merciless” steps – a harsh approach that could further impair the financial stability of struggling individuals and businesses.

The Minister’s recommendations are intended to inspire a balance between the necessity of loan recovery and the harsh realities borrowers face in the present economic environment. It calls for compassion in an arena often dominated by stringent financial rules and regulations.

Banks, traditionally, have been stringent about loan repayments due to the risk involved in the process. A loan default affects not only the bank’s finances but also its capability to provide loans in the future. However, the Finance Minister’s advice suggests reconsidering this stance, requiring banks to show empathy towards their borrowers while not compromising their financial health.

While the Minister did not explicitly outline the steps that constitute “merciless” actions, it is presumed to include practices such as immediate foreclosure, rapid sale of collateral, abrupt account freezing, and excessive litigation. These practices, while legal, can push borrowers into more precarious financial positions, an outcome the Minister wants to avoid.

Banks may need to review and revise their debt recovery strategies. This could involve providing more flexible repayment options, extending grace periods, considering loan restructuring or even temporary forbearance in extreme cases.

For borrowers, the Finance Minister’s announcement is welcome news. Many borrowers, both individuals and businesses, have been adversely affected by recent economic upheavals. A more forgiving stance by banks could alleviate financial pressures and provide a much-needed respite for these struggling entities.

However, borrowers must remember that the goal is not to absolve them of their obligations but to make the repayment process more humane and manageable. Thus, while banks may become more accommodating, it is still crucial for borrowers to make a sincere effort to meet their loan obligations, albeit in a potentially more lenient environment.

The Finance Minister’s call for a gentler approach towards loan recovery signals a more compassionate stance on financial issues in these difficult times. While it requires a delicate balancing act from the banks, the potential benefits of financial stability and public goodwill could be significant.

However, it’s crucial that this advice doesn’t incentivise reckless borrowing or lax loan-issuing policies. The success of this approach hinges on banks maintaining stringent loan approval processes and borrowers understanding that their obligations, though potentially more flexible, still need to be met. This and other economic recovery measures could lead to a healthier and more compassionate financial environment.