High provisioning no pain no gain

High provisioning no pain no gain

Trust in India banks' integrity supreme concern
The RBI has reportedly asked banks to make steep increases in the provisioning for bad loans that are referred to bankruptcy courts. This might appear tough: the banks will have to find something like an additional ` . 50,000 crore this year and a like amount next year, at a time when they , for the most part, make losses, meaning they will have to find fresh capital. It might also appear to hinder the bad loan restructuring exercise. However, setting aside resources to cover possible losses would serve to reinforce trust in Indian banking's integrity and the security of depositors' savings. Clearly , the banking regulator makes this the overriding concern. We concur.
A sensible way out for the banks is to sell their bad loans to asset reconstruction companies, private equity or vulture funds at a discount and get an immediate fix on how much loss they make and how much provisioning would be called for. This is superior to the banks trying to invoke the bankruptcy code themselves and going through the two-year or so process of getting a revival package approved and implemented or seeing the company through liquidation. Crisil, based on an assessment of embedded value in the top 50 NPA cases, estimates that a 60% haircut would be needed on these loan assets. This is smaller than the 100% provisioning that banks would be required to make in cases of attempted liquidation. Banks must get additional capital to underwrite the impact of a haircut, or of higher provisioning pending asset reconstruction. The government can infuse fresh capital in the banks it owns directly or create a holding company for state-owned banks that can leverage its own capital to raise resources that can be used to capitalise the banks. Or the government can allow the banks to raise capital from the markets, allowing its stake to be diluted.
The need is to allow all factor markets to function properly, so that the valuation of companies up for liquidation would improve and, thereby, reduce the banks' provisioning requirement. Resolving the bad debt problem involves some inescapable pain.