The Big Picture – Tackling the NPA explosion: Privatisation or Bankruptcy bill
India’s 95 trillion banking sector is under crisis. 29 state owned banks have written off as much as 1.14 lakh crore rupees of bad debts between financial years 2013 and 2015, much more than they had done in the preceding 9 years. The RBI says, “While bad debts stood at 15551 crores for the financial year ending March 2012, by 2015 this figure increased by 3 times.” All this prompted the Supreme Court to remark that “rich people take crores of rupees loans and declare insolvency, while poor farmers are suffering.” The RBI had submitted the list in a sealed cover with the request that the information be kept confidential or else it would have a serious impact on the economy.
The large figure indicates that many, who borrow, including big industrialists, are unable to pay their loans back and service them. Even the banks have lost the ability to collect and hence the lending has been very indiscrete.
The problem started when private banks were nationalized in 1969. Till then, banks were more used to sanctioning working capital and not term capital or investment banking. For investment banking the government then had created three separate banks. But their role ended in 2005 and that is when the nationalized public sector banks started lending tem loans. However, they couldn’t rise to the occasion and hence lost the ability. Another problem was that they were raising short term money and lending long and this led to a mismatch. Besides, they also did not have credit assessment ability.
Main reasons behind the rising debt:
- Small loans given under many popular schemes are generally written off under political pressure.
- Few big loans, given under political pressure, are written off too.
- No proper restructuring.
- A major portion of bad debts arise out of lending to the priority sector, at the dictates of politicians and bureaucrats.
- Wrong lending decisions are also to be blamed.
- Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers.
- Core sectors have also been underperforming.
What’s the solution?
- Reduce the government’s interference. Bring down government’s shareholding in the public sector banks.
- Professionalize the management in decision making.
- More public scrutiny and public discussions are also needed.
- NPA recognition has to be matched by adequate amount of recapitalization.
- Pressure on both borrowers and lenders should be built up.
- RBI should strictly enforce the existing regulations upon the banks.
- Banks should also strictly monitor the loans given.
- Willful defaulters should be punished.
In the long run, however, we need long lasting solutions. In the absence of which, the banking sector will undergo a real crisis. Banks are also in danger of losing their market. Hence, it is time for the government and the RBI to come out with a smart option to resolve this issue that can no longer be put on the backburner.