Sunday, March 26, 2017

Why Bad Bank is a bad idea


In the recent years, we have been hearing that the banks in India are having a tough time in dealing with NPAs. Most of them started posting losses. The NPA has become a serious threat to the very existence of the banking industry. Many lenders are uncertain about the future of the banking sector in India if this situation continues. It became common for the bankers to have meeting with the Finance Minister regarding the NPA issues. There were several measures taken to reduce NPA in the banking sector including formation of Asset Reconstruction Companies or ARC. However, it also failed pathetically.

When a loan becomes NPA bank starts recovery procedure. If the loan was unsecured, they go for Revenue Recovery or files a money suit in court. However, this takes more time, normally more than a year thanks to the inefficiency of the system.
If the loan is secured, the bank can use SARFAESI Act to seize the secured property and realize the loan dues. Even this process takes months to complete.
The bank will also go for restricting of loans. If the borrower is not a willful defaulter but he is not able to pay the EMI and the business is viable, the bank will increase the tenure of the loan by reducing EMI. Here sometimes a portion of the interest is waived or interest rate is also reduced if needed. But this will happen rarely as there is a problem of staff accountability.
Next method is to sell the NPA to Asset Reconstruction Company. The decision for the sale of education loan to ARCs have caused protests from several political parties as well as Medias.


Bad Bank

The new idea is to set up a bad bank. The function of the bad bank is to take up the loans from other banks so that the banks can concentrate on their business of lending. Even though it is a good idea, it has more cons than pros.
What are the powers vested with the band bank. Do they have extra powers than ailing PSUs? They have to do the same job as that of the PSU in tackling NPAs. It saves the PSU from provisioning of bad loans. But who will fund the bad bank for taking up of huge amount of NPAs from these PSUs. Will the government have the capacity to fund bad bank wholly or it will be a public private partnership. Will it have extra powers to deal with willful defaulters? For example, can bad bank realize the loan amount of an unsecured loan without the intervention of government department or court like SARFAESI?
The transfer process itself needs lots of paperwork and inspection at several levels. More over condition of some projects that are viable if restructured will get worse due to this waste of time.


What government should do

In my opinion, bank loans dues must be treated like the due to the government. The Law of Limitation must be scrapped first. I don’t know who is the pumpkin head behind this idea in introducing this into the banking system. No political party must interfere in the banking business whether to sanction a loan or recovery. Many politicians discourage people from repaying loans for funding their petty vote banks. Some ministers even declared loan waiver scheme, which destroys the financial discipline of the people. If they want to help the borrowers, give the money for those repay the loan in full.
Recently China showed how to treat with the willful defaulters by denying several government services. Like that India too must show courage to tackle with the willful defaulters by reducing the government services to them and also allows the bank to find and attached any property with them, providing a threshold as it must not take away the only shelter of the defaulter.