The Big Picture - Writing off bad bank loans
The state of Indian banks especially the PSB have been a matter of serious concern for few years now, Growing debts, loans turning in to non performing assets is noticed quite regularly in recent years. However it has reached alarming level as these NPA’s are being written off as bad debts by the governments. According to a report 29 PSB have wrote off nearly 1.14 lakh crores between 2013-15.The alarming debts between 2013 and 2015 is 60% compared to 4 % in 2004 and 2012.
Why NPA’s and what are the solutions:
In most of the cases assets created by the bank remain unutilised or partially utilised due to ineffective Management, and presence of paralysed dispute resolution system. It is high time that Government of India pass Bankruptcy law so that these assets are put to proper use and existing management goes out bringing a new lease of life for the sector concerned.
Also a strong necessary to create ARC (Asset restructuring companies) by RBI and GOI which will be able to take such stressed assets in hand and give it to professionals who can handle them better. These two steps will be helping the country a lot.
The weak macroeconomic situation is also one of the reasons for increased NPA’s and tendency on part of banks to ever green loan accounts and these are not reflected properly in balance sheets, However on insistence of RBI the ever greening loan accounts are now put on balance sheets and so is the alarming NPA’s.
Conflict between social banking and commercial banking is also one of the reasons for increased NPA’s.
Crony capitalism and political interference: Government is using PSB to push its policy even when the economy or stock markets are not performing well. As a result the large part of NPA and bad debt is the result of the fact that government and political leader ship back certain kind of loans (Crooks and non existing companies) and those loans turns in bad debts.
Sectors like Infrastructure, Mining, Iron and steel, all natural resources prices have collapsed, these are some genuine economic reasons that are responsible for the present situation, but the worry now is that these sectors are not stabilising. Infrastructure, transport, Shipping, Roads etc is some of the sectors that need to be subsidised hugely by government and governments has a tendency to depend on banks to subsidise these sectors. There is a need to delink this culture from the pressure on the banking sector that they have to finance this.
Writing of loans is a part of credit restructuring program, Write off as a way off treating bad loans among other options is always been there but what is important is that there is no clarity on what percentage of bad loans are written off.
Banking dept is responsible for taking care of PSB, there is a need to treat PSB same way as private sector banks as private sector banks are in a better position than PSB. One possible reform that is needed is abolishing the control of banking dept by GOI making the banks regulated completely by RBI and also free from political interference. In addition to this autonomy has to be made effective so that the policy that government has on its cards need not be backed up banking sector.