There’s a new proposal in town to tackle the Rs 7 lakh crore toxic loan problem of Indian banks. Aptly named a bad bank, the idea being championed by Chief Economic Adviser Arvind Subramanian, and seconded by the new RBI deputy governor Viral Acharya, will shift bad loans into a new state-run entity so that banks can avoid self-suffocation. Despite efforts, stressed loans of all banks touched an alarming 16.6 per cent of total loans. Public sector banks have been in intensive care for long and the quarterly health bulletins only indicate further deterioration. The ‘deep surgery’ administered by former RBI Governor Dr Raghuram Rajan with measures like flexible refinancing, strategic debt restructuring, asset quality review seemed like they would usher a new dawn. Yet, renaissance never happened.
The bad bank concept promises cure by wiping out all sour loans in one stroke, but it’s easier said than done. The NPA menace is a complex issue and a one-size-fits-all solution will prove to be temporary. Like previous efforts, this too lacks the strategy to tackle the problem just where it begins—loan sanctioning. It all started with banks throwing money after the bad, without considering project viability. The problem compounded with lenders ever-greening loans to avoid finger-pointing and defaults. Sadly, the situation persists, particularly to those with deep pockets. These companies aren’t making money and have stopped payments, yet remain in business. Over ten corporates owe nearly Rs 40,000 crore each and loan recovery from just these borrowers will give a lifeline to ailing banks.
When NPAs cannot be nursed back to health, they need to be foreclosed or sold. The former cannot recover the entire loan, the latter incurs a huge loss to lenders. Either way, banks have to take a hair cut. Sadly, banks aren’t going to do this on their own and unless the government steps in with bold decisions, the bad loan menace will continue to persist.