RBI Of­fers Ban­dage, Not Bad Loan Cure

The Economic Times - - The Edit Page -

The Re­serve Bank of In­dia (RBI) has of­fered some respite to state-owned banks drown­ing in bad debt. Of a list of 150 over­lever­aged com­pa­nies, the RBI has knocked off around 20, in­clud­ing Jaiprakash As­so­ci­ates, which have sold as­sets and re­duced their debt. So, lenders will have to put aside less cash to cover bad debt. Their March quar­ter num­bers might look slightly bet­ter than the De­cem­ber quar­ter, when Bank of In­dia, IDBI Bank and Bank of Bar­oda notched up losses of .₹ 1,505 crore, .₹ 2,183 crore and .₹ 3,342 crore, re­spec­tively. An­a­lysts, who pre­dicted a near-90% crash in the prof­its of state-owned banks, might breathe a lit­tle eas­ier. Re­ports say the RBI has given th­ese 20-odd com­pa­nies more breath­ing room be­cause their stake­hold­ers have sold some as­sets to re­pay debt. But the RBI’s gen­eros­ity is a ban­dage, not a cure for the af­flic­tions of the country’s bank­ing sys­tem. Es­ti­mates of bad loans run into lakhs of crore ru­pees. Some, but not all, re­sulted from col­lu­sion and graft be­tween bor­rower and lender. Gov­er­nor Raghu­ram Ra­jan re­cently said some loans turned bad be­cause projects once thought fea­si­ble ran into reg­u­la­tory or other hur­dles. We need a new bankruptcy code, to fa­cil­i­tate liq­ui­da­tion or trans­fer of own­er­ship of in­debted com­pa­nies. This will need leg­is­la­tion, and could take time. Mean­while, as­set re­con­struc­tion com­pa­nies (ARCs) should take over dis­tressed com­pa­nies from banks at a dis­count and con­vert debt to equity. ARCs can try and turn them around, or sell them on to prospec­tive buy­ers or liq­ui­date as­sets. Af­ter the Vi­jay Mallya episode, many banks have turned risk-averse and might not want to in­cur reg­u­la­tory wrath by sell­ing off as­sets to new pro­mot­ers at a dis­count. Hav­ing ARCs as in­ter­me­di­aries could of­fer them some com­fort.

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