Markets, Not Coercion, Will Cure Bank NPAs
On Monday, the heads of 10 top public sector banks (PSBs), led by Arundhati Bhattacharya, chief of India’s largest lender, State Bank of India (SBI), met finance minister Arun Jaitley. The objective was, ostensibly, to discuss the load of bad debt on the books of banks and how to manage it. But as this newspaper reported, a far more serious topic was on the agenda: the threat of harassment of bank officers and management by income tax, enforcement, the Central Bureau of Investigation (CBI) and other investigative branches for loans made in the past that have subsequently soured. This is not paranoia: in January, the CBI arrested a former chairman of IDBI Bank, questioning his decision to lend .₹ 950 crore to the now-defunct Kingfisher Airlines.
The arrest froze lending for new projects, as bankers turned increasingly riskaverse. But if PSBs, India’s largest lenders, are paralysed, the flow of credit to business will dry up, choking any chance of revival of investment and growth. Estimates say that by end-December 2016, bad loans were 12.5% of total lending in the system, an appalling number. Fear of arrests will prevent bankers from agreeing to any realistic haircut while restructuring bad loans, stymying things further. Instead of barking at banks and sending sleuths to hound lenders, the government must give them confidence to resume their normal activity of lending and accepting deposits. Liquidity must return to the system. India now has a new bankruptcy law: if loans go bad, banks should invoke its provisions to quickly seize assets of companies and sell these to asset reconstruction companies, which can then auction these to the highest bidder. Market-led solutions, not sarkari coercion, must be the cure for our bad-debt headache.