Bad loans time for government to take remedial action
Banks Board Bureau chairman Vinod Rai has written to the finance minister and the Prime Minister’s Office about the need to expedite restructuring of the banks’ bad loans portfolio. He has reportedly suggested expanding the role of the Oversight Committee and some technical refinements. But the problem holding up bad loan restructuring is not technical in nature — rather, it is political. Loan restructuring will entail banks taking a haircut, substantial in many cases. Bank chairmen want the assurance that they would not be held responsible for this. No one wants to go to jail for causing loss to stateowned banks and, thereby, to the exchequer. This means that the government must give them political cover. That is the nub of the challenge. After its electoral success in Uttar Pradesh, the Narendra Modi government has the political capital to push for banks to take some discounts on loans that have gone sour, convert debt to equity and find new buyers for these. The government has been hesitant to push very hard on this, because it fears that it will be accused of crony capitalism by opposition parties. Today, with increased political capital, New Delhi must not run from opposition jibes. The reassurance to public sector bank managements that they will not be hounded for accepting haircuts to clear up their books, by agencies like the Central Bureau of Investigation and the Enforcement Directorate, is essential to resolve the banking crisis. Otherwise, the bank liquidity crisis and NPA levels will spiral out of control, choking lending and growth. In other words, spurring further investment and growth in the economy hinges on political rather than technocratic decisions. The point is for the government to lose no further time to take remedial action.
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