BAD BANK: Will It Work in India ?

India, our country, is currently having NPA/Bad loans of more than 4.50 lac Crs. Which is only a guess. It may go much higher if really the books are cleaned by the Banks. To combat this situation of reporting the truth, there are various options flying in the year. Some of the popular suggestions to the GOI by the high profile finance advisors are :

a)      To avoid to clean the books completely in one go. It may damage the books of the banks to such an extent that they will not be able to stand again;

b)      To sale the assets to ARCs at liberal terms so at least some assets can be shown in the books;

c)      To create a separate bank called Bad Bank for NPA assets and transfer all such loan accounts to this bank;

d)     To liberal the parameters of classifying an account NPA for some time so the economy can be revived;

In past lot of loan accounts have been assigned to Asset Reconstruction Companies (ARCs) but this was done mainly to:

a)      Avoid the accountability and save the skin of the lenders;

b)      Benefit the selected cartels; or

c)      To show the books much better than reality.

Hence the purpose was not served as far as the banking institution or the borrower is concerned. In this situation, it would be difficult for the lending banks to convince about the option of assigning more and more loan accounts to ARCs. One day it may become a major finance scam of the country.Another option of getting liberal or slow in cleaning the books may not be official but practical decision which will be never known to the public. Banks never accepted that their books are not showing true picture. The loan accounts were window dressed and to the maximum possible extent reported as performing asset. I surprise why this word of “cleaning of Books” came into news suddenly. Does it mean that the PSU Banks now admit that so far the books were not clean?

So, the only option left to exercise is the creation of a special bank to handle NPAs/bad loans of all the PSU banks. This bank is being called as ‘Bad Bank” which will be flooded with all the NPAs . The concept of bad bank is not new globally but in India this can be a new experiment. RBI Governor has expressed doubts about the efficacy of such a bank. In my view the establishment of Bad Bank can be a good idea if handled properly. Just imagine a bank with all the stressed accounts having expert team of managing , reviving or recovering the loans. Such bank can help a lot in revival of the NPA accounts and save the livelihood of millions of people. Recovery should not be the only focus otherwise it would become another ground of corruption. Such banks should also have experts from all the sectors, positive attitude people with a zeal to help in revival of the bad loan accounts. One of the major reason of getting loans bad is slow decision making, lack of field expertise, highest level of EGO, Greed, Corruption, Political nexus etc…etc… However, creation of such bank should not be taken as shield for fixing accountability of the lenders.

I strongly believe that there is no harm in experimenting this idea of creating a Bad Bank. I am sure GOI will serious give thought to this and save the public money going into drains. Also it may save the jobs of millions of poor people.