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Dear finance minister, end this drift on bad loans

editorials Updated: Jun 29, 2016 19:14 IST

Grim talk: It is time for finance minister Arun Jaitley to fix the problems that RBI governor Raghuram Rajan is highlighting. (REUTERS)

The Reserve Bank of India’s latest report financial stability shows the worst may not be over for the country’s mountain of bad loans — or non-performing assets (NPAs). The report has a worst-case scenario in which the gross NPAs (loans that stop yielding interest payments) may rise to 9.3% of total advances at the end of the current financial year from 7.6% at the end of last March — with stress tests suggesting that based on current realities, they would still be as high as 8.5%. This is not what we want to hear as India positions itself as a safe haven for global investors, being the world’s fastest-growing major economy. With monsoons looking good after two bad years, what we need are efforts to plug every hole in the India Story. Instead there seems to be a bureaucratic drag in the drive to bring bad loans under control. This drift must end.

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The RBI has started a programme, S4A (Scheme for Sustainable Structuring of Stressed Assets) on the lines of the Troubled Asset Relief Program (TARP) that the US started after the global financial crisis of 2008. But S4A , which involves converting parts of corporate loans into equity, seems to lack momentum. An earlier “strategic debt restructuring” mechanism also did not go too far in changing the managements of debt-ridden companies. State-controlled banks are reluctant to take drastic measures. Partial write-offs or “haircuts” by lenders may be inevitable to end the current crisis but the flip side may be emerging opportunities in a high-growth economy. What we cannot afford is a slow-motion recovery.

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We have had early measures to boost asset reconstruction companies that may take difficult loans off bank balance sheets. We now need innovative schemes that may bring in aggressive private equity players and management experts apart from asset reconstruction specialists to rescue companies in a joint action plan to revive credit growth. Some front-loading of fiscal support for public sector banks may also not be a bad idea. The RBI is a diagnostician, not a physician, in healing this malady. The clean-up eventually requires inspired action in New Delhi.