Good banks and a bad bank

Good banks and a bad bank: The infrastructure sector continues to reel under the 'twin balance sheet' issue...

Bad bank can be worse

Apropos “Good banks and a bad bank” (Business Standard, March 27), the urgency in reversing the rise in stressed assets with banks is universally admitted  without any reservation. When it comes to solutions, there can be, and there are, difference in perception of responsibilities and therefore methods to tackle the problem of bad assets with banks being suggested by different stakeholders too differ widely. In any case, it is late in the day to think of a surgical approach isolating sectors like infrastructure or industries or farm loans and any solution will have to have the health of banks in view.
The bad bank idea, which was mooted last year didn’t find favour with the then RBI governor Raguram Rajan. The change of guard at Mint Road together with the compulsions arising from the severity of the bad loan problem plaguing the system, which has not so far been responding much to normal ‘treatment’, helped media and analysts to make a second attempt. A theoretical approach with some forceful arguments in favour of sucking out RBI’s reserves to fund institutionalization of bad debts, squeezed into Economic Survey 2016-17,  looked prima facie, too good.
Banks with huge amount of stressed assets are also big enough to do whatever a newly constituted institution can do to make the NPAs perform or close the accounts after recovery of whatever part is recoverable. With appropriate legislative and legal support from GOI in the same manner banks form consortiums to lend to large projects banks can make joint efforts to pool resources and make joint recovery efforts. Such joint efforts will reduce the chances of borrowers shifting from one bank to another for softer treatment in regard to financial discipline.
Like the disinclination to repay unleashed by agricultural loan waivers, the very concept of a GOI-owned “bad bank” does create the problem of moral hazard as it creates incentives for banks to be reckless. The responsibility to recover or ‘provide for’ loans disbursed going bad should remain with the lender. Shifting this responsibility to another institution and funding the losses from taxpayers’ money raises the more serious question of public perception and potential damage to the reputation of the financial system.
M G Warrier, Mumbai

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