Arvind Subramanian says bad debt is esential part of capitalist system

The concept of a bad debt is not altogether a bad idea and, in a capitalist system, even big corporates get trapped in bad loans, at times needing government bailout, the government's chief economic adviser Arvind Subramanian has said.

Recognition of bad loans is necessary in a capitalist system though it may lead to charges of corruption and crony capitalism, he said.

He also pointed to the need for a 'national bad bank' to nurse those bad loans back to health, although at times there may not be an alternative than writing off such debt.

The CEA's remarks come at a time when the banking system in the country, which is dominated by state-owned lenders, has seen its non-performing assets (NPAs) or bad loans more than double to Rs6,95,000 crore in 2015-16 from nearly Rs2,97,000 crore in 2012-13.

The total stressed assets, including restructured accounts, constituted more than 15 per cent of the total advances of banks in the country, as of December 2016.

Subramanian said while there are several suggestions on ways to tackle the mounting NPAs, the most realistic is the setting up of a 'bad bank', which, he said, could be a state-owned entity to collect banks' sour assets and try to resolve the stress.

He, however, admitted that the solution may also include writing off the bad loans where there is no scope of revival

"It is a very difficult problem and not unique to India. No political system finds it easy to forgive debt to the private sector, especially to big companies," he said, while delivering the Hormis Memorial Lecture organised by Federal Bank on Tuesday evening.

Subramanian pointed to the twin balance sheet problem, of stress in the corporate sector as well as the banks due to bad assets, which needs to be resolved so as to facilitate credit supply to the economy.

He also said that the bad bank will adopt all other options of resolution, including changing the promoters and management of the corporate as well.

"You need to be able to forgive those debts because this is how capitalism works. People make mistakes, those have to be forgiven to some extent," he said.

"Political system has to be able to do that and bad bank is one way of trying to do that," he said.

Setting up of a bad bank to hold such loans did not seem to be a top alternative for policy makers.

Such an idea was also put forth by RBI deputy governor Viral Acharya in a recent public speech where he favoured the creation of a public sector AMC and many such entities run by the private sector to resolve the problem of bad loans.

The idea was recently backed by international credit rating agency Fitch.

"Creating a bad bank could accelerate the resolution of stressed assets, but it may face significant logistical difficulties and would simultaneously require a credible bank recapitalisation programme to address the capital shortfalls at state-owned banks," Fitch had said.

In this year's Economic Survey, the CEA had come up with the idea of the bad bank which would be funded from a portion of the large balance sheet of the Reserve Bank.

Last year also he had made a similar suggestion, which was opposed by the then RBI governor Raghuram Rajan saying this would create a moral hazard. It would only be creating another problem to solve an existing problem, considering the Indian situation.