How to deal with Rs 700,000 crore non-performing assets with banks?
The billion-rupee question now doing the rounds is how to deal with Rs 700,000 crore non-performing assets (NPA) with 42 scheduled Indian banks. Owing to policy paralysis and ‘sweet heart deals’ swung during 10 years of the previous UPA government, the build up in the NPAs has been exponential, becoming a major drag in implementing Narendra Modi’s development agenda.
While a lot of streamlining in the banking sector has happened in the last two-and-a- half years, much more needs to be done. Unless the clean up in both private and government-owned banks is done on a war footing, these institutions have the potential to conclusively disrupt the India growth story.
There are two major global examples before us to prove beyond doubt that without a robust banking system, the best of the economies with strong fundamentals could crumble.
Japan’s lost decade of 1989-99 is the biggest example cited by global economists to underline the need in India to ‘act fast’ with corrective measures. Even though the Japanese leadership delayed counter-measures to save their banks, sharp and swift action limited the damage in one of the largest global economic powerhouses.
Japan’s multifarious strategy, including capital infusion, high inter-bank rates and restructuring with mergers, acquisitions and closures, saved the country’s economy from utter collapse.
In fact, it was these measures, which resulted in resurrection of ‘zombie banks’, a euphemism for organisations saddled with NPAs. The massive clean up act that extended up to 2002, though challenged by global leaders, led to the emergence of four major nationalised banks in Japan. Equally, an entire decade was denied to Japan because of her over loaded banking system and the failure of banking regulators to curb the menace.
Similar trouble from the banking sector emanates from Italy, capable of taking over the entire European Union (EU). Over ¤290 billion worth of non-performing assets led to stymied GDP growth not just in Italy in the last two to three years, but was likely to have a contiguous effect on the EU itself.
In the Indian context, two suggestions made by chief economic advisor Arvind Subramanian and RBI deputy governor Viral Acharya need immediate attention. The big issue is to consider setting up a ‘bad bank’ to house all the NPAs. Alternatively, the government needs to consider constituting two asset management companies to deal with NPAs of private banks.
NPAs, also an outcome of stuck infrastructure projects in aftermath of the global financial turmoil, need to be segregated by RBI before it proposes to write offs loans as part of the clean up.
Whatever the model adopted, banks may have to ease their burden either through write offs in phases or ‘take a shave in one go’ by selling the stressed assets to either the bad bank or AMCs.
The modus operandi in liquidating top 50 stressed assets, as suggested by Acharya, will have to be jointly formulated with both the RBI and government working in partnership.
Perhaps, a political consensus based on a white paper on NPAs need to be considered by the government. Only then would the banks will be able to offload the stressed assets.
Hastening re-capitalisation, mergers and acquisitions and shutting down some banks may have to be considered on an urgent basis, apart from bringing down the government’s equity to 49 per cent.
One can only hope that our national banks that have the depth to withstand market volatility would emerge following the churn. Unless this is done, there’s a great threat to the India growth story from the banking sector.