Can the new mechanism on banks’ bad debts work?

In view of earlier failures, it needs a lot of political will and determination

It took the government a year to get its act together to set up a mechanism to resolve issues over stressed assets of banks, financial institutions and insurance firms. One hopes the move for a bill on a Resolution Corporation and its implementation isn’t delayed and will be done in a time-bound manner. It needs a lot of political will and determination to ensure that the mechanism works swiftly and efficiently. The problem is huge, as the banks’ stressed assets are of around ~10 lakh crore: It’s intriguing how despite the RBI’s oversight this problem was allowed to reach such gigantic levels. A huge pileup of stressed assets couldn’t have happened overnight: It was obviously building up over the years. One has to wait and see how the 12 cases identified by the RBI will be dealt with by the banks. If the first two or three cases are successfully settled, there is some hope.

The Indian Bankruptcy Code is a good measure as it will instill some fear in the minds of borrowers who wouldn't want to see their assets liquidated. It gives banks the power to coerce defaulters to pay up. There was, and still is, some talk about a "bad bank", that would take over the non-performing assets of bank loans, so banks could carry on with regular business. But it remained at the talking stage. The “bad bank” approach was adopted by the United States and Britain, and they were quite successful.