oppn parties Loans Gone Bad: What is The Way Out?

News Snippets

  • Trouble brews in Bihar JD(U)-BJP alliance as Bihar police asks special branch officers to keep tabs on RSS activities
  • Trust vote in Karnataka assembly today. With rebel MLAs deciding to stay away after the SC order, the Congress-JD(S) government is likely to fall as it does not have the numbers
  • Amit Shah says the government will identify and deport illegal immigrants from all parts of the country
  • Reports from Pakistan confirm that Hafiz Saeed has been arrested and sent to jail
  • After the SC order, Karnataka Speaker says he will go by the Constitution in deciding on the resignations of the 16 MLAs
  • Rebel MLAs say they will not attend the trust vote on Thursday
  • Supreme Court rules that rebel MLAs cannot be forced to attend the assembly and vote in the floor test
  • Both the Centre and the Assam government have sought re-verification of up to 20% of draft NRC data
  • Pakistan opens its airspace for Indian planes
  • Dilapidated building collapses in Mumbai, killing more than 10 people while many were still trapped
  • Kulbhushan Jadhav case verdict to be delivered today by the ICJ
  • A Vistara flight landed in Lucknow with just 5 to 10 minutes of fuel left in the tank
  • Supreme Court to decide on Karnataka MLAs plea today
  • Karnataka alliance to face floor test on Thursday
  • China says that the next Dalai Lama will be appointed by it
International Court of Justice agrees with India, stays Kulbhushan Jadhav's execution. It asks Pakistan to allow consular access to the accused.
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Loans Gone Bad: What is The Way Out?

By Ashwini Agarwal

To tackle the non-performing assets (NPA’s) of banks, the government is working on three fronts. The first is the recent ordinance that amends section 35 of the Banking Regulation Act. The second is to amend the Prevention of Corruption Act in order to insulate bank employees against prosecution for decisions taken in settling a bad loan that might involve interest rate cut or a haircut. The third is the strict implementation of Bankruptcy Act. But taken together, will these measures work?

The first measure empowers the RBI to intervene if banks are not able to come at a settlement. It allows the RBI to give the banks a 60-90 day window to sit with the defaulters and thrash out a way through which the loan is recovered instead of just sitting on the books. If the banks are not able to do that within the window, the RBI will step in. There are several large defaulters (Bhushan Steel Rs 47000 cr and Essar Steel Rs 45000 cr, to name just two) who need immediate attention. But one thinks that neither their assets nor the position of their business permits the repayment of even a small part of the loan. What happens in that situation?

There are several big loans that have little or no chance of being recovered. The ideal way would be to recover what is possible and write the rest off. Instead of continuously keeping the books of banks stressed, a one-time hit and subsequent recapitalization is the better way. Simultaneously, the parameters for advancing loans must be so tailored that such huge loans to single entities are not given at all. It will hamper growth, but it will not result in money going down the drain. The promoters do not lose anything as they take out their contribution in various ways even before the project takes off. It is the banks who are left holding the bag.

However, the current measures are a step in the right direction. The government must now think of further hard measures to counter the menace. Talking to promoters and restructuring is all very good, but in the end money needs to be paid. This situation has largely arisen due to favouritism on part of politicians and corruption on part of bankers. Unless these twin issues are tackled effectively, there will be more bad loans and no amount of legislation or policing will stop it. picture courtesy: moneycontrol.com