Context : A report in Indian Express that banks have written off  many zeros ( lesser than 2G scam though) of debt in last 2 years.

Q. What is the state of banks in India at present?

1. Situation is very alarming with mounting bad loans.

2. Bad loans haven’t bottomed out. They are only going up and expected to reach up to 6.5% from more than 5% right now in a year.

3. Bad loansn are putting strain on return on asset, profitability.

4. Substantial erosion in the valuation of banks. Valuation of all PSBs is half of private banks. It will put problems in bank recapitalization.

Q. Why are NPAs rising?

1. General economic downturn. Sectors such as steel, commodities even infrastructure are feling the pinch.

2. Policy paralysis leading to stalled projects.

3. Improper management of loans by the banks leading to assets remaininh underutilized.

4. Crony capitalism.

5. Judicial system which take years and years to resolve cases and in the process all the value of asset is lost.

Q. But why the pace has increased in last few quarters?

1. RBI governor has asked banks to clean up the balance sheets by march 2017. Earlier loans were not being shown as NPAs, now same loans are being shown as NPAs.

2. General economic downturn esp commodity collapse

Q. Why is situation of public sector banks so alarming compared to private sector banks?

1. Social banking distorts public sector culture.

2. Loans under various political compulsion.

3. Crony capitalism, political interference. They have to back up govt policies.

4. Do not have autonomy. They have to act counter cyclically i.e. lend more at the time of general economic downturn to turn the economy around.

Q. But why the write off ? Will any good come out of it?

1. Balance sheets will be cleaned up. Actual state of NPAs will be out in public domain.

2. At present banks linger on with bad loans, do not classify that as NPA, keep on lending to repay the loan, eventually promoters lose interest. So called ever greening the loans and extend and pretend policy.

3. Beside write off, must include infusion of promoter equity and appropriate govt policy to resolve sector wise problems like debt of state electricity board.

Q. What is the way forward now?

to recover existing loan

1. Pass the bankruptcy code.

2. Create Asset Restructuring company (ARC) backed by govt and RBI and let it be handled by professionals.

3. Though standing committee reports that Corporate Debt Restructuring(CDR) has failed, where CDR is done, throw the old management out and run those companies by professionals.

On long term basis

1. Let PSBs run on commercial lines, give them autonomy and ensure day to day functioning is handed over to professionals without govt interference.

2. Provide subsidies via budgetary provision, don’t ask banks to subsidize.

3. Delink banks from deptt of banking to avoid political interference.

Now it’s mandatory to pass all the credit information to Credit Information Bureau of India Ltd. (CIBIL) and find out standing of promoters, company before sanctioning any new loan. make this institution even more effective. It will bring transparency and sunlight is the best disinfectant.