There are many explanations for Indian banks’ bad loan crisis, best captured by the increase in stressed assets from 5.9% of loans in March 2011 to 11.9% in December 2017. But if there is a common thread running through myriad explanations, it is that a permissive regulatory culture allowed banks to understate the extent of the problem. Consequently, a predictable increase in bad loans when economic growth slowed down turned into a serious problem which required a massive bout of recapitalisation of public sector banks. It is this permissiveness which RBI is belatedly eliminating – with push back from industry and others.
For example under the tightened norms for classifying a loan as an NPA, borrowers are expected to meet their payment obligations on the due date. But finance ministry reportedly wants RBI to relax this one-day default norm to 30 days for a period of one year. Attempts to tighten the system in the past have also been countered by arguments that both banks and floundering firms need hand holding during a difficult phase. Indeed, even the current resolution framework does that. The primary objective is not to liquidate a company unable to repay a loan, but to resolve the problem. In the process, oftentimes the promoter of a firm and a bank may have to bear a cost. This is far better than delayed recognition of problems that allows many to game the system, leaving the hapless taxpayer to pick up the tab. Government, therefore, should firmly back RBI’s attempt to change this system.
What is being worked out is a framework for timely recognition of problems and a gradual escalation of the resolution process for troubled loans. If this system works well India can significantly improve its 26% recovery rate for bad loans – as compared to over 90% in Japan.
This piece appeared as an editorial opinion in the print edition of The Times of India.
via Due date: Government should fully back tougher NPA norms