The government and banks are planning to take a tough stance on loan defaulters who can pay, but will not.
The government is planning changes in laws that will let banks take strong punitive action, including pressing of criminal charges, on such defaulters.
“This issue must be looked into. Where is the guarantee this won’t happen again, so most banks have raised this issue that the wilful default needed to be treated as criminal offence,” the head of a large public sector bank told HT.
The banking sector has been beset with non-performing assets (NPAs) — loans that have turned bad — which have risen due to slow growth and delays in project implementation. For 39 listed banks, gross non-performing assets rose by 26.87% to Rs 3.4 lakh crore for the quarter-ended September 2015, year-on-year.
The Narendra Modi government is also expected to come out with a mechanism that would ensure timebound closure of legal cases pertaining to NPAs.
At present, such cases can drag in various courts for several years, delaying the recovery process for the banks.
In recent days, mounting bad loans and high default rates by large companies have drawn criticism from experts and regulators.
“If you owe a lot of money and still celebrate birthday bashes, it gives a wrong message to the people.. If you are in trouble cut down your expenses, show to the people that you are doing something,” Reserve Bank of India (RBI) governor Raghuram Rajan told NDTV in an interview at Davos last week, on the sidelines of the World Economic Forum.
Rajan had also recently asked central bank employees to show no leniency towards rich “wrong-doers”.
“No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop,” Rajan, known for not mincing words, had written in a message to the central bank’s employees recently.
Economist and MIT Professor Abhijit Banerjee has also said it was essential to bring down the high levels of bad loans in Indian banks.
“One area where we absolutely need to do something is the banking sector,” Banerjee said, cautioning against rising default rates among big corporations and a tendency to form the habit to default.
“It is like giving large gifts to large people,” Banerjee had told HT journalists recently.