Chanakya IAS Academy Blog


Bad loans slowing, remain a challenge

Bad loans slowing, remain a challenge

Union Finance Minister remarked that the resolution of Non-performing assets (NPAs) of banks remains a challenge. Though the rate of increase of such bad loans had slowed in recent times.

The Core problem of NPAs:

  • It involves large corporates in sectors like steel, power, infra and textile.
  • These sectors saw a capacity expansion during the boom period (2003- 08), but the global financial crisis and resulting slowdown created excess capacities in these sectors
  • This led to creation of NPAs specially for banks which had large scale exposure to these sectors

Why this issue has gained urgency:

  • Gross Non-performing assets (NPAs) reached an all-time high in September 2016 and most of these are concentrated in the books of public sector banks
  • Regulatory changes initiated by RBI has not yielded desired results
  • This has created a situation where policy makers are now exploring new ideas

Resolving the Issue by creating a bad bank:

  • The idea of a Bad Bank to take over stressed assets is still under discussion
  • It was floated by Chief Economic Adviser, Arvind Subramanian in the Economic Survey for 2016-17
  • Survey even suggested government should at times consider bailing out large corporate borrowers even at the risk of being charged of crony capitalism to surmount the NPA problem
  • RBI deputy governor even said that a piece by piece approach won’t fix the problem

Various possible alternatives that exist:

  • These are being debated on public platforms
  • Establishing a Public-Sector Asset Rehabilitation Agency (PARA). Such an agency should only consider those cases of NPA’s where sector specific reforms do not provide a solution
  • Tough action should be taken against willful defaulters which should include naming and shaming them
  • Criminal action should be initiated against large willful defaulters
  • Allow state governments to bid for stressed assets
  • The Chief Vigilance Officer of various public sector banks should be made part of the bank’s credit committee and the banks board should first take a call about the decisions taken by their officials, rather than investigating agencies acting directly based on their own information
Read 1077 times Last modified on Thursday, 16 March 2017 11:39

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