The bad loans situation of Indian banks is not of recent making, but the banking system's monies were lying in non-performing assets for a long time now, finance minister Arun Jaitley said on Wednesday, even as bad loans with the banking system hit record 9,50,000 crore.
Narendra Modi government inherited a banking system whose monies were lying in non-performing assets and restoring financial health of banks is top priority for the government, Jaitley said even as India's bad loans situation continued to worsen.
Banks in India are in a strange situation with total stressed assets, including non-performing and restructured loans, rising 4.5 per cent in the first six months of ended June 2017.
At the same time, lending is increasingly becoming a difficult job with low corporate demand and retail lending hit by low offtake. But, Jaitley said, the government is working on a plan to rebuild the capacity of the banking sector so that it could support growth.
''Today, with global growth turning around, we are working to put up an actual plan in play to deal with the banking situation, which is top of our agenda. We need to rebuild the capacity (of the banking sector),'' Jaitley said at Harvard University in Boston.
The finance minister is a week-long visit to the US to attend the annual meetings of the International Monetary Fund and the World Bank.
India's bad loans have been getting worse since 2011 and, according to World Bank data, loan defaults in the country were at a staggering 9.2 per cent of the total loans in 2016, second-highest in Asia after Pakistan (11.3 per cent).
India's bad loans have surged drastically in the past six years Ė from around 2.67 per cent in 2011, NPAs of Indian banks surged to 5.88 per cent in 2015 and in just one year it has shot up to 9.18 per cent.
The sharp rise is a worrying factor for both banks and financial authorities in the country.
To deal with rising bad loans, the government introduced Insolvency and Bankruptcy (IBC) Code in May 2016, creating a single law for insolvency and bankruptcy.
However, the effects of the law have already had some impact on corporate debt, there are still roadblocks to banks reclaiming their monies as other stakeholders could still stall debt recovery proceedings.
NPAs in India are reported to be mostly loan defaults by infrastructure and core sector industries like power, steel, road, textiles etc.