Economic advisor backs `bad bank' proposal to tackle NPAs
22 February 2017
The chief advisor to the finance ministry, Arvind Subramanian, has backed a call by Reserve Bank of India deputy governor Viral V Acharya to set up a separate entity to nurse public sector banks' ballooning bad loans back to health.
India needs to set up an institution similar to a ''bad bank,'' Subramanian said, adding that troubled loans are weighing on the banks' ability to lend and holding up investments.
The finance ministry's chief economic adviser said that delaying a cleanup would further reduce private-sector investment and make the problem worse for Asia's third-largest economy.
State-owned lenders, however, are not ready to acknowledge the need for a clean-up, rather say the clean-up would further complicate things for the banks.
They say the process would make loan recovery more complicated and delay loan restructuring.
But, with banks' nonperforming loans continuing to mount, economists say it has become imperative to tackle the record $133 billion in stressed loans held by Indian banks by last September.
With average NPAs of state-run banks mounting to 12.34 per cent of their total loans and to over 20 percent in the worst cases, RBI deputy governor Viral Acharyaon Tuesday proposed the creation of a private-based agency or a government asset management entity to buy and restructure the soured loans.
But, bankers expressed opposition to the proposal, saying it would take too long to agree on how the scheme would work and then risk further delays as the institutions are set up.
Instead, bankers urged the RBI to stick to an existing framework and make improvements, if required.
New rules under the former RBI governor Raghuram Rajan forced banks to first recognise the true extent of bad loans and then provided flexibility to restructure them, including by measures such as selling them off to private companies.
"Creating an institution itself is not an easy task," said a senior banker at a state-run lender, who declined to be identified commenting on the RBI. "The better way would be to use the existing infrastructure."
Critics of the existing RBI framework for restructuring bad loans have warned it leaves banks with too much discretion in solving the problems - a view echoed by Acharya, who called for a new approach of "tough love" for lenders.
But, critics also argue that a so-called "bad bank" will also bring its own problems as such an approach would simply shift the burden of recovery to the `bad bank', leaving banks enough discretion in lending operations, which could further sour loans.