Banks seek specific steps in Budget to tackle bad loans

Banks seek specific steps in Budget to tackle bad loans: A ‘Bad Bank’ to take over stressed loans among suggestions in Ficci-IBA survey


February 25, 2016
Bad Bank, not a good idea!
This refers to the report “Banks seek specific steps in budget to tackle bad loans” (February 25). Going by past experience, once central government gets fixed on an idea, all stakeholders will support it for different reasons. A new institution is always welcomed by the under-employed retiring/retired bureaucrats, in whose hands the implementation of new ideas land even today. It means a number of new job opportunities, huge resources and a long ‘gestation period’ for accountability to surface.
Reserve Bank of India (RBI) Governor Raghuram Rajan had, long back, expressed the view that the concept of a good bank and bad bank may not be relevant for India since much of the assets backing the banks’ loans are viable or can be made viable. He dwelt on the subject in some detail while delivering the CK Prahlad memorial lecture last time and argued that given most of the assets are viable, it would make sense for the banks themselves to recover the dues while adding that in cases where loans are not priced appropriately when transferred to the bad bank, it could create issues. Thus, Dr Rajan was in favour of helping the banks clean up their balance sheets, recognising it as their responsibility.
Dr Rajan’s plea makes sense also because public sector banks(PSBs) which have higher level of stressed assets are big enough to create their own arms for tackling wilful defaulters and where loans become irrecoverable, there may not be much gain from ‘sale’ of portfolios at throwaway prices, just for removing them from banks’ books. What PSBs need is a clear go ahead signal from GOI to do their business professionally. There should be clear differentiation between ‘social responsibility’ and banks’ commercial business. When social responsibilities are thrust upon PSBs, they should be compensated by government to the extent of losses incurred by implementing such programmes.
At a time when several new players are preparing to enter the banking business, the message that will go out to the public by creating an entity to handle stressed assets alone at a cost can be disastrous to the trust on which the financial sector is dependant for survival.
M G Warrier, Mumbai


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