Saying ta ta
How to break the bad loan cycle of PSBs. Catalyzed by an ordinance promulgated by the government in May, banks and their regulator RBI have kick-started measures to resolve bad loans. This is a positive development as systemic aspects of the banking system had acted as a drag on the resolution process. It needed an external prod to break the logjam. But the prod is inadequate by itself. For it to work, the resolution process will have to be backed by infusion of capital from the government. An unrelated development gives a sense of the multidimensional nature of the bad loan problem. A few years after beginning operations for a 4000 megawatt power plant in Gujarat, Tata Power is now willing to sell majority stake in it for a token rupee as running it in prevailing circumstances appears unviable. It is symptomatic of the problems various struggling projects face today: the world has changed and they are no longer workable without large impairments. Eventually, cost of these impairments will have to be borne by banks during the resolution process. Therefore, resolution without the support of adequate capital is meaningless. It is up to government to figure out how to deal with it as India's bad loan problem is primarily a public sector bank problem. At this point, it is important to remember that it seems to be a recurring public sector bank problem. Twice in the last two decades they , as a group, have found themselves in trouble. This suggests flaws in their governance structure which can be traced to government control. If hapless taxpayers have to once again bail out banks, it should be on the condition that government maintain an arm's length relationship initially . This should be followed by letting go of majority ownership.
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