The Bad Loans Problem: An Approach to a Solution | SPJIMR

The Bad Loans Problem: An Approach to a Solution

Hemant Kumar Manuj

Author: Hemant Kumar Manuj

Date: Thu, 2017-03-16 17:47

The issue of the bad loans (BL) problem in India has been festering like a sore for several years now. It is now being recognised by the Government, the Reserve Bank of India (RBI), and the influencers of public policy as an important issue that needs a fast resolution. To my mind, this is the single biggest economic issue that needs to be resolved by the policy makers today. This has been holding up private investments for several years and is likely to choke any growth in demand and jobs in the economy in the coming years. This issue has clouded the various constructive measures taken by the current, as well as the previous governments, for inducing corporate demand. Beyond the obvious economic dimension, there are dimensions of social and political impact as well.

Let’s evaluate a framework for resolution of the BL problem. There should be three steps in the framework to systematically resolve the BL problem.

1.  Identify the reasons that led to the BL problem. There are systemic reasons and specific reasons for the banking loans turning into non-performing assets (NPAs), and these will require different approaches to the solution. Here I deal with the systemic reasons only.

2. For the systemic reasons, the policy makers need to develop the appropriate solutions with the sole objective of getting the maximum sustainable benefit to the broader economy. Each solution would have its costs and benefits to various stakeholders. Hence there should be clarity, in advance, as to what is expected of the solution.

3. Building the buy-in of the stakeholders and a swift implementation of the proposed solution.

Now I elaborate on the first two parts of the step. The third step is not covered by me in this article.

1.    Reasons for the BL problem: 

There are principally two system-wide factors that have led to the BL problem.

Firstly, the exuberant level of leveraged growth in the corporate sector post the global financial crisis (GFC) was not supported by an adequate level of "what if" analysis by the investors. It may be argued that there have been sharp and unprecedented regulatory and policy level developments in the last few years, adversely affecting the safety and returns of private investments. However, in hindsight, the majority of corporates and banks failed to swiftly develop and implement a strong alternate plan to deal with a sharply changed environment and thereby protect their risk capital.

Secondly, as already observed, there have been some very significant and unanticipated developments in the regulatory and policy environment. The changes have been brought in by the governments as corrective measures to ensure long term transparency and efficiency in the core sectors of the economy. However, it can definitely be argued that these changes needed to be supplemented with other measures which could have ensured a smoother cycle of transition. The governments (mainly Central, but also State) have failed to timely enact and implement supplemental laws/ policies to enhance, or at least protect, the prevailing contracts surrounding the operation of the sunk-in investments. The stalling of a significant portion of the large private sector projects could be directly linked to the cancellations of existing contracts, delays in award of fresh contracts, and delays in implementation of supportive policy measures.

While the BL problem can be attributed to both the investors (including lenders) and the Government, the former had very little leeway to act in the absence of the enabling steps to be taken by the latter.

The RBI has come up with several measures to get the lenders and the borrowers to work towards resolving the bad loans. For instance, subventions were provided in the form of allowing more flexible rescheduling of project completions, and certain types of restructuring (5/25, S4A, Strategic Restructuring). However, these could have helped only as temporary measures, till the projects got back into fully operational mode. As a pre-requisite for these measures, therefore, it was essential to have strong corrective policy measures swiftly enacted by the Government.

Apart from the above, the policy makers failed to realise the critical importance of a stressed asset market, while urging the lenders and the borrowers to transact in stressed assets. Since there is a virtual absence of an independent price clearing mechanism, the banks are forced to agree to subjective prices for sale of stressed assets to either the Asset Reconstruction Companies (ARCs) or any other counterparty. The absence of adequate capital and effective competition in the private markets represented by ARCs and the environment of post facto investigations of the transactions by the government agencies has further constrained the transactions.

2. Proposed solution:

The solution needs to be developed,  keeping in mind the reasons behind, and the prevailing circumstances surrounding, the BL problem, as presented above.
Since the factors, cited above, have largely emanated out of the difficult and unprecedented regulatory and policy conditions, it is imperative that the Government steps in as the principal "rectifier" of the problem. Secondly, it would be very much within the domain and the interests of the government's wider role to restart the overall economy by strengthening the balance sheets of the corporates and the lenders.

This would mean, basically, that a National ARC be formed to buy a significant part of the stressed assets using budgetary resources. The price of the assets can be determined by an independent panel, to be accepted by all parties. The role of the government should be to facilitate, and purchase, the stressed assets at an independently determined price.

While the above suggested measure may initially appear to be drastic, at least going by the theory of incentives, there is actually no practical alternative without the major involvement of the government. Had there been one, the same would have already been adopted by the private parties.

In terms of the benefits from adopting this approach, the corporate investments will get an immediate kick-off leading to demand and job creation. This, in itself should be a huge kicker for the economy. The government can also, in all likelihood, benefit from the improved valuations of the bought out loans in due course.

The proposed solution is not without precedence. It has similarities to the SUUTI framework implemented earlier. The details of the solution can be further worked out through time-bound consultations by the Government with the RBI, lenders, borrowers, and other relevant stakeholders and independent experts.

It is imperative that the government acts fast and decisively on the issue. The political dimension of any approach to resolution that involves government capital is likely to be also an important factor. However, with the right framework of communication and implementation, it would indeed be in the interest of the government to move forward and realise the benefits of a corporate and banking sector revival.





Thank you sir, for sharing your views on one of the biggest issues that is plaguing our economy currently. Enormity of bad debt problem in banks can be gauged by the fact it is estimated that there are 6.97 lakh crores of NPAs lying in the books of banks and out of this around 6 lakh crores NPAs belong to public sector banks. An institutional mechanism along with enabling legal framework is very much need of the hour to resolve this issue. However I feel a National Asset Reconstruction Company (ARC) solution suggested will not resolve the issue on long-term and sustainable basis. ARCs are supposed to work on resolution and revival model. With the government’s entry in this sector again typical issues and inefficiencies related to government’s functioning in business domain will resurface, which in fact may aggravate the problem in long run. In fact, root cause of many NPA cases are believed to be political interference in bank lending rather than hardcore business consideration. In this crisis there is an opportunity to develop whole new industry around distressed assets and develop specialized skill set of industrial revival experts. An enabling policy and legal framework will help in evolution of ARCs in a big way and provide sustainable solution for this problem. Till now Indian experience with ARCs has been a mixed bag but little helping hand from authorities can surely improve the situation. Biggest issues that is being faced by ARCs is promoters interference after debts being referred to ARCs and inability of banks acting as a group in case there are multiple lenders to the project. Curtailment of promoter’s rights, conversion of debt into equity and consortium approach on part of banks can help ARCs smoothly taking over the NPAs and effectively turnaround businesses rather than being vehicle for book transfer of NPAs from banks to ARCs. Currently ARCs role is limited to financial restructuring, which may not work in many cases. So there is need for widening ARCs scope of work so that more turnaround stories can emerge for cases transferred to ARCs.
hemant.manuj_1770's picture

Thank you for your comments. You are quite right that ARCs should be encouraged for the resolution of bad debts. While that is a long term solution, in the short term, they are neither adequately capitalised nor have the requisite skills. Since most of the bad debts have a linkage to government policies, the govt should have a role in their faster resolution too.

I broadly agree with the author that bad loans problem is one of the biggest issue facing the economy, however this may not be the single largest economic issue. I would say broad economic reforms are also holding back the economy which include inter-alia labour reforms and effective implementation of the insolvency and bankruptcy code. Besides various government and regulatory hurdles which push back the ease of doing business in the country. As on date the stressed assets are close to Rs 10 lakh crore which is about 7% of our GDP. Most of the investments that have gone sour are in the iron & steel, construction and power industry. The reasons could be some corporates stretching too far and public sector banks lending to their projects without a rigorous due diligence process. Further, it cannot be ruled out PSBs lending to corporates under political or other pressures. This is also evident form the graph that NPAs of private sector banks are much less as compared to PSBs. Indeed, the bad loan problem needs a quick solution so that banks balance sheets are credible and healthy. However, the solution may not lie entirely by setting up a National asset reconstruction company and transferring all bad loans to it. It would amount the government taking over all the bad loans and an easy exit route for PSBs. Further, as government has earmarked only Rs 10,000 cr in the budget this year for capitalization of banks, it is not clear from where the money will come. Further, there is no guarantee that future loans of PSBs will not turn sour. Instead it may be advisable that lead banks of each lending consortium restructure the bad loans in consultation with the loan recipient in presence of reputed third party sector specialist and government representative. The assets which are beyond recovery should be outright sold. Also as some of our existing PSBs are quite small, these should be merged with some big banks so that the combined NPAs of larger entities are within reasonable limits.

Hi Hemant, Thanks for coming up with this great article which is absolutely relevant today, more so after the Kingfisher fiasco. It’s long since corporates have abused the loose laws around loan recovery and turning bad loans as NPA (nonperforming assets). Bad loans have adversely affected the state exchequer and non-recovery of the same has resulted serious implication on interest rates. Recently the Narendra Modi govt. has passed the ‘Bad Loans Ordinance’ bill which has given more power to the RBI and in-turn the banks. As a result biggest corporate houses such as Reliance, Adani, Essar, Jaypee, GMR, GVK etc. selling off their assets to repay their bad loans. It looks like with continued perseverance and stricter implementation of the ordinance, the govt. will be able to tackle the bad loans problem to a great extent.

Thanks for writing this blog and enlightening us with insights of persisting bad loan and probable efforts to be made by the stakeholders to bring NPA level down. I can’t agree more with you about how the burgeoning bad loan malaise is creating ripple effect in the economy. For last few years, the government and RBI is up in arms about NPA by taking certain prescriptive actions such as declaring restructured accounts as NPA from the date of restructuring, introducing fast-tracking bankruptcy law, proposing Bad bank, creating of Banks board bureau and recently empowering RBI to tackle with bad loan. The only question here is how much time will these efforts take to show the result? Undoubtedly, the worsened situation of NPA in India especially with the PSU banks cannot be resolved overnight. It is a humongous task to eradicate this persistent problem. Yet even after couple of years of introducing these measures, NPA level stands high and in fact is growing year on year. With the approval of ordinance to amend Banking Regulation Act, a new ray of hope has emerged. Banks are empowered by relaxing JLF norms i.e. approval by minimum of 60% creditors by value and 50% by number in the forum to restructure loans. I presume that with newly promulgated ordinance to empower RBI and introduce corrective action plans coupled with expected growth in economy, overall NPA level of banking industry should recede quickly and significantly. All these improvements will not only lead to reduction in NPA but also will drastically improve the balance sheet as well as valuation of stocks of banks. With the support of government to recapitalise banks and series of reform actions, we can truly see a silver linings for the banking industry.

A very well structured blog makes it an interesting read. This blog describes a topic which many may find a bit difficult to understand but the use of framework which the author uses makes it very easy to understand the issue in hand. The use of graph makes it even easier to understand. Author also details some of the limitations of the solutions he is proposing. The bad loans are truly an issue that should be dealt with by the government on high priority. Thank you, sir, for helping us understand a bit more about the topic.

A very well written and informative article sir. You rightly got out the systemic problems that banks face in recovering the bad loans. An other major problem I want to highlight is banks are not willing to take any haircuts to have a speedy resolution, out of the fear of investigations from vigilance authorities. A very recent example is the arrest of the IDBI bank officials for the Kingfisher loan default case. Along with a host of other measures that the government of India should take, they should also get bankers out of this fear from investigation agencies by removing bankers out of Prevention of Corruption Act. This change will motivate the bankers to deal with the problem more swiftly. The government has recently made a few policy changes. One of these changes being, giving extra power to RBI to tackle the NPA problem of a bank if it is not able to handle it in a given period. While we will have to wait to know how this works out, if we have a look at the NPAs as a whole the majority of them (around 75%) are from the steel and the power sector. I think rather than being reactive, the government should be proactive in looking at sectors periodically to analyse if the players in any sector are more likely to face problems. This give heads up to banks about the probable NPA’s that they might be staring at and act more quickly.

Prof Manuj has effectively pointed out the core issues of the piling up bad debts problem in India and also suggested some possible practical solutions to tackle this problem. It is not surprising that the recent announcements by the government to empower RBI to take measures to curb NPA problem is of the same tune with that of the author. The issue of bad debts is a massive economic issue troubling the government since long. This severe problem is kept unattended most of the time due to lack of power to RBI and banks. The sudden growth in some industries proved to be like cancer to the banks. On top of that, government regulations to fund SME and mid-corporate, Agricultural credit waiver, lack of security in small tickets added to the NPA problem. Along with that, poor credit risk assessment methodology, rush to achieve targets, incentives to achieve numbers, political pressure, lack of knowledge of credit officials, ignorance of early warning signals and lack of follow-ups with bad debts were responsible in the unacceptable growth of bad debts. As a breath of fresh air, the banks have finally found a road map to drive out of the NPA jam. The cabinet has cleared the NPA Resolution Package that includes a presidential ordinance amending the Banking Regulation Act. It gives RBI the necessary power to more effectively deal with stressed assets. Hopefully, the banks will now grab this opportunity and jump to clean up their balance sheets burdened with bad assets. We need to wait and watch how the actual implementation turns out to be.

The issue of NPAs isn’t a stranger to the Indian economy which had its traces in the early 2002-03 but the closure of FY 2015 for the banking system sent jitters down the stock markets that portrayed NPAs as high as over 8% of their advances where the banks were compelled to make provisions for the NPA plummeting their profits. Why is it very significant in the present scenario? What made the government and the regulators to react now ? In the early 2002-03,when the credit fuelled economic expansion marked its beginning and private companies especially in the power and infrastructure domain unleashed their spree of expansion at the expense of the credit from the banking system. But the NPAs reduced from 7% in 2002-03 to 2% in 2004-05 due to the boom in the economy and positive response of the global and domestic markets. The scenario of NPAs in 2011-12 was completely different as rightly portrayed by the author as to the lack of the investor support that leveraged the exuberant growth post the global financial crisis. Also I would like to add to the systemic reasons of the author that lack of transparency, soaring crude oil prices fuelling inflation and unstable political scenario delayed or almost stalled the projects which led to the growth of NPA from 2.3% of advances in 2007 to 3.1% in 2012 and then never looked back. As the author rightly pointed out it was too late for our banking system to react enacting swift and strong policies to curb the NPAs. Though I would accept with the author’s framework of that creating a strong Asset reconstruction Company (ARC) and seeking the intervention of the government to facilitate the repurchase of the NPAs I would like to remind that the government’s prudent fiscal management FY 2017-18 to curtail the fiscal deficit at 3.2% with net borrowings restricted to Rs.3.48 Lakh crore leaves it a very little room to spear head this solution. We are in a very dismal situation of cleansing the balance sheets of the public as well as private sectors. I would suggest a different perspective which can act as both cure by resolving the current NPAs and also a prevention in shielding the banking system from recourse in the future. The government should tap the potential of the dormant corporate bond markets in reviving the situation. The ARC should be an effective company alike the Berkshire Hathaway but with a board of economists, regulators and industrialists headed by an able Warren Buffet who would strengthen the banks with the credit from the corporate bond market and then recover the bad loans. Also policy measures of credit restructuring emphasising the exploration of the bond markets would ensure risk diversification, off-loading the banking system. It is indeed a herculean task for the government of India and the RBI but I would say all it needs is a Warren Buffet of India to wave his magic wand and cast the spell to recovery.

Hemant sir, thanks a lot for sharing your views about one of the major issue plaguing our Banking Industry off late, namely NPA’s (Non-performing assets). I agree with you that a solution needs to be quickly worked out and implemented for this menace. However my question is, will it end the misery forever? As per my opinion, NPA’s are created mainly due to political pressure than due to systemic failure. As per statistics updated in RBI website on NPA’s as on 31st March 2016, SBI and its group has NPA’s of Rs 688944 million, Nationalized banks have NPA’s of Rs 2514814 million, Private sector banks have NPA’s of Rs 266774 million and foreign banks have NPA’s of Rs 27669 million. These figures indicate that nearly 91% of India’s NPA’s are created by Nationalized banks (including SBI and its associates). A further diving into past statistics, reveals that this percentage contribution has almost remained same over years. What is further alarming is the fact that, as compared to 31st March 2014 the NPA figures went up by nearly 22% as on 31st March 2015. As on 31st March 16 it further went up by another whopping 100% (as compared to 31st March 2015). It can be understood that the nationalized banks are under political pressure, as can be seen from the case of "King of all Bad times" (am referring to Kingfishers case). It does not end here. Even the farmer’s loans which are given at subsidized rates are given to rich farmers, who later claim waiver along with other farmers, and our political fraternity approves the same too. Our current government has come out with an amendment to the Banking Regulation Act wherein they have empowered RBI to enable banks to quickly recover NPA’s. The banks should use this opportunity and resolve all NPA’s as on date. Will this bring NPA’s issue to an end – I don’t think so. Permanent solution to NPA’s can happen only when political pressure on banks is completely eradicated and banks do thorough check before sanctioning any loan of any value. Hoping for this change.

Sir, Bad Loans indeed are a serious problem and could not agree more that this needs urgent attention and fast decisions. In order to further substantiate on the numbers already stated, NPA (Non-Performing Assets) of the banks were at Rs. 6.97 lakh crores as of December 2016. They now constitute an average 11% of public sector banks gross advances and 5 public sector banks have NPA’s which are 15% of their gross advances. Data is based on compilation by CARE rating agencies. Thus, the magnitude of the problem is large and needs urgent attention and action. As has been rightly pointed out that problem arises when a company is highly leveraged and does not achieve the growth and momentum. However, it is not always that investors would be in a position to question the same, if the plan presented seems reasonable and logical originally but meets with some scenarios not envisaged while planning. The model would look perfect and in a capital intensive sector, it would take a long time before one realizes. It is only when the first big loss occurs that one would understand the pressures. A lot of power projects or infrastructure projects would have a similar cycle and government regulations do largely impact the same. Having said so, we cannot also ignore the case when it is known to a few in the company who divert funds for benefit of a few and causing loss to others, including the lenders. The problem of bad loans by willful defaulters is being dealt with by the government which has just passed an ordinance to give RBI the powers to force insolvency proceedings against the willful defaulters and also to guide the banks in the process of how the same can be enforced. Banks in past have been wary to use this route as there would be some short recovery or settlements which will have to be worked out to ensure closure of the bad loans. The fear is of scrutiny from investigating agencies, which may go behind the officials signing the settlements accusing them of favouring or being partial causing loss to public funds. This matter however, could get further complicated with consortium banks where multiple banks are involved and each would want to take a different route to resolve the issue. However, passing of the ordinance is just the beginning and government still needs to do a lot more, including unclogging the over-burdened judicial system to deal with the large number of cases that may arise out of such actions. This surely is an important aspect and needs highest consideration as this affects the available cash flow in the economy and other development activities which can be improved if the bad loans are realized.

Prof. Manuj has clearly pointed out the issue of Bad Loan prevailing in India Economy and has also suggested a structural approach to find out the solution. I am agree with author on the view that It is a national economic problem and that requires a political solution hand in hand with a clear government commitment to stand behind core national assets. Policy makers are now more cautious about the India’s bad loan problem. It is very clear that Bad loan problem is one of the most serious issue faced by Indian economy. Gross NPA of state owned banks has been surged 56.4 % to Rs. 614,872 crore during the last 12 month period ended Dec 2016. It is expected that there will be further rise in current period, especially in the small and medium sectors. As per the current statistic, bad loan have now shot up by 135 % from 261,853 crore in the last two years. As per the current statistic Gross NPA reached Rs.7.1 lakh crore at the end of March 17 against Rs.5.71 lakh crore at the end of Mar 16. Around 37 listed bank has kept aside Rs. 2 lakh crore as provision in financial year 2017 towards NPA. To resolve the issue of bad loan, RBI has announces various schemes, however that was remained largely on paper re. Under the SDR scheme Banks were encouraged to convert the loan into 51pc equity. Under this scheme only two sales have taken place due to viability issue and it unable to help banks resolve their bad loan problem. In the case of S4A scheme, banks were unwilling to grant write-downs as there were no incentives from Central Government to do so, and write-downs of large debtors could quickly exhaust banks’ capital. In the asset reconstruction scheme, the major problem was that ARCs found it challenging to resolve the assets they had purchased from the banks. They wanted to purchase the loans only at low prices and banks were reluctant to sell the loans to them at lower price. The Economic Survey has proposed a more enhanced role for the government. It has suggested that to set up a centralized Public Sector Asset Rehabilitation Agency (PARA) that would buy up the bigger non-performing assets. A single institution would address the problem with contextual solutions.

In India, the average non-performing assets or bad loans of public sector banks are about 75% of their net worth; for many banks, they have exceeded their net worth. This is really a reason for RBI, government & tax paying people to be worried about Now the question is why & how did the Indian banking system get into this huge problem? There are various reasons behind this mess. The normal reasoning one can think is that the govt-owned banks are inefficient & corrupt, they have given loans to individuals & organizations with a corrupt intentions. This could be an over-simplification of the real root causes for the problem of bad loans. Certainly, when we compare, private banks are in better shape, however in some sectors where both private and public banks are serving, both have suffered badly. The private banks have much less bad loans because they have not given loans to some sectors or companies. When world was facing huge recession 2008, growth was nearly stopped in the world, but India was quite insulated from that as our government gave huge economic stimulus through bank loans to promote growth. RBI cut its policy rates significantly and flooded the market with liquidity and banks gave loans indiscriminately. This artificial boom created long term problems for Indian banking system I fully agree with you Sir that there is not straight forward and easy solution to this problem, solution needs to be prepared based on reason behind each specific bad loan rather than thinking of one single solution to entire problem. Govt should get into real crisis resolution mode to avoid situation going out of control. I would echo your view that government should form national ARC and buy major part of bad assets using central government budget provision. It is very important for the government to act swiftly and decisively on this problem.

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NPA or bad loans really very worrying situation for RBI, Government and Banks. The average NPA’s are almost 70 to 75% of the net worth of banks. There are many reasons behind this mess. In my personal opinion one of the reasons is corruption in the government owned banks. They have given loans to the individuals and organisation with the corrupt intention. Private Banks are little safe as they don’t sanction the loan to some sector or companies. This is the real route cause of the bad loans. When world was facing recession in 2008, Indian government allowed bank loans to maintain/promote growth. RBI cut its policy rate and market was flowing with the liquidity. Another major problem in political will or pressure. Kingfisher is not only the case even the farmer’s loans given to rich farmers on subsidized rrates are being waived off under political pressure. Governments are formed, if they give commitment to waive off the loans be it central government or state government. CM of UP announced waiver of bad loans of farmers within two weeks of form the govt. Subsequently, it is being followed by Punjab and Maharastra. Following solution can be/are being used by the banks to reduce or recover NPAs:- 1.The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court 2. Lok Adalats: Lok Adalat is for the recovery of small loans. According to RBI guidelines issued in 2001, they cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are covered. 3. Compromise Settlement: It is a scheme which provides a simple mechanism for recovery of NPA. It is applied to advances below Rs. 10 Crores. 4. Credit Information Bureau: A Credit Information Bureau help banks by maintaining a data of an individual defaulter and provides this information to all banks so that they may avoid lending to him/her. 5. Debt Recovery Tribunals: The debt recovery tribunal act was passed by Indian Parliament in 1993 with the objective of facilitating the banks and financial institutions for speedy recovery of dues in cases where the loan amount is Rs. 10 lakhs and above. But I don’t think, it will end the NPA’s. Permanent solution can happen only when banks are permitted to do through checks before sanctioning any loan without any political pressure and corrupt officers are sent to jail.

Hi. Appreciate you putting together this article. It nicely explains persisting bad loan and probable efforts that are being made by the stakeholders to bring NPA level down. I can’t agree more with you about how the burgeoning bad loan malaise is creating ripple effect in the economy. For last few years, the government and RBI is up in arms about NPA by taking certain prescriptive actions such as declaring restructured accounts as NPA from the date of restructuring, introducing fast-tracking bankruptcy law, proposing Bad bank, creating of Banks board bureau and recently empowering RBI to tackle with bad loan. The only question here is how much time will these efforts take to show the result? Undoubtedly, the worsened situation of NPA in India especially with the PSU banks cannot be resolved overnight. It is a humongous task to eradicate this persistent problem. Yet even after couple of years of introducing these measures, NPA level stands high and in fact is growing year on year. With the approval of ordinance to amend Banking Regulation Act, a new ray of hope has emerged. Banks are empowered by relaxing JLF norms i.e. approval by minimum of 60% creditors by value and 50% by number in the forum to restructure loans. I presume that with newly promulgated ordinance to empower RBI and introduce corrective action plans coupled with expected growth in economy, overall NPA level of banking industry should recede quickly and significantly. All these improvements will not only lead to reduction in NPA but also will drastically improve the balance sheet as well as valuation of stocks of banks. With the support of government to recapitalise banks and series of reform actions, we can truly see a silver linings for the banking industry.

Thankyou Professor Manuj for writing on an issue which is indeed most critical in the present economic landscape. The exasperation of the bankers in resolving the bad loan issue is clearly visible when Arundhati Bhattacharya, head of the largest PSB in India, herself states- “anything that will help to put these stressed accounts into becoming standard would be welcome.” However, I believe that creation of a national asset reconstruction company may not be the best solution to tackle this problem. Cleansing the murky balance sheets of PSBs through a ‘bad bank’ does not solve the core issue which is improving the quality of the stressed assets. Recapitalization of banks does not remove the toxicity of the stressed assets. It is analogous to cleaning the mess of the house and hiding it under the carpet. Moreover, it is not sustainable in the long-term. The first question that arises is whether bad banks will be financed by the government. The NPAs of public sector banks stand at around 6 lakh crores. If the government plans to be the majority stakeholder in the ARC, procuring the required funds for the same will be a tall ask. A bad bank owned by the government will also face similar challenges in managing the bad loans as faced by the public-sector banks. In 2015, the Strategic Debt Restructuring Scheme (SDR), which allowed banks to convert their debt into equity, failed because neither did PSBs have the required expertise to run the companies nor could they head hunt for new promoters and managers to take over the stressed assets. They continued to remain dependent on the company promoters for resolution. The government owned ARC will also lack the expertise required to manage the loans and it may not be able to pay specialists required to manage such assets. Thus, a government owned ARC will essentially transfer the problem from one part of the government to another. Bad banks are useful when projects are not viable. However, according to RBI figures, most of the stressed loans pertain to projects that are viable. These projects are stalled due to reasons which are extraneous to them like land acquisition problems, environmental non-clearance, licensing issues and so on. Such projects can be revived through restructuring and additional funding. Moreover, selling these loans to a bad bank would just slow down the cashflows into these projects which would in turn lead to accumulation of further debt and outstanding interests. Thus, these projects should be allowed to revive organically as they have the protentional to generate cash flows. The present NPA problem raises questions on the quality of lending made by banks. Will the creation of a bad bank and cleaning of the banks’ balance sheets assure that the PSBs will become more responsible lenders in the future? Will it ensure that there will be no political interference in sanctioning of loans henceforth? Will this cleansing also flush out willful defaulters like Vijay Mallya? If the answers to the above are fairly positive, I shall have no qualms with the concept of a bad bank.

Great information ......Yes when we are unable to pay loan.its cause of bad credit score when we destroy our good will in the bank we unable to get loan for next time.

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Thank you sir for giving us an insight on one of the most important issues that is being plaguing our economy for the past 8 years. The situation has been further aggravated by the tenacity of the banks to keep on lending credit to the defaulting companies in order to keep them afloat. Furthermore due to the prevalent political intervention and government policy paralysis in our economy none of the initiatives which were introduced by the RBI till date has seen fructification. Government has finally paid heed to this issue and has acknowledged it as a growing menace to the economy as a whole and in order to recapitalize the stressed banks, a humongous package of 2.11 lakh crore has been announced by the finance minister. An estimated 1.35 lakh crore out of this package needs to be borrowed from the market for capital infusion, the details of which is yet to be unveiled by the central bank. However this addresses only one half of this problem and little interest has been shown by the banks to recover the bad loans from the defaulting companies. In view of the same, the RBI as well as the finance ministry is finally contemplating on setting up of a centralized Public sector Asset Rehabilitation Agency (PARA) which would work in complete isolation to the banks and would solely focus on recovering the bad loans within a stipulated time period. Its basic modus operandi as well as its composition (public and private) are still under deliberation and are expected to be resolved at the earliest. However the government’s intent to resolve the issue at both fronts has finally provided a glimmer of a hope to finally see the end of this Twin Balance sheet problem for good.

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pls tell me pron/cons of measures are the sufficient ? what are the other measures which will grow the npa sector

Thanks for sharing this burning issue which has created panic in country's entire financial environment. In my view the BL has got multiple impact on Indian Economy . Industry is not able to perform because of over leveraged Debt and the Banks are not able to give credit to excel the growth of Infrastructures which creates unfriendly business environment. To resolve this issue Government needs to push the Big ticket Infrastructures projects like Power,Roads, Expressways, Waterways which are locked up by huge capital that has been borrowed by the Industries and they are unable to execute the projects due to non approval/Land acquisition issues/Environmental issues from various departments. The Government needs to implement these projects on the basis of single window clearances. Once the projects will start performing the NPAs will be coming down . The other solution would be refinancing the Public sector Banks so that private players can take fresh loans which are cheaper than Private Equity funds. The Housing sector which has badly affected due to shortage of funds and demand has fallen sharply in last five years . This situation has created lot of NPAs which are to be narrowed down if the developers are refinanced by Banks. On the Demand side if developers are giving focus on affordable housing then things will start rolling. The debt can be repaid and NPAs will start coming down.

I am in strong agreement with the author that bad loan problem is the biggest problem that banking sector (Particularly Public Sector banks) of our country is going through. Despite having regulation from Schedules Commercial Banks & RBI, this menace is not getting eradicated or even reduced with time. In my view, Government, since ages, kept control on these banks by one way or another (Legal or illegal). Today, maximum part of bad loans from PSBs are given to those who does not deserve it, took loan from banks by way of creating political pressure from ruling party of State or Centre. Reason behind allocation of loans to non- deserving parties are official holding the PSBs top position, since these top positions are filled in consultation to Ministry of government. Government, first of all, should minimize their intervention in selection of Board of Directors of these PSBs so that they should not work under pressure to Ministry or Political Party to oblige them in return to his selection the boards of PSBs. Also, every government in their election manifesto Commit to waive off the Agricultural Sector loan to farmers that PSBs, as mandatory Primary Sector Lending, give to Farmers and allied sector. These debt are never recovered as a return to banks. The moment, government wishes to act upon to reduce the burden of banks, the days are not far when PSBs will participate wholeheartedly in lending to needy and SMEs who deserve it to take progress of our country forward.

Thank you Sir for the insights about Bad loan problems which are crippling our economy. We have just started with Macroeconomics and we know how complex are economic reforms to control different parameters of economy. NPAs is one such parameter which if avoidable will help in investments on different sectors. The NPAs suck the liquidity out of the market which means less cash flow. This can negatively affect the economy as some businesses won’t be able to take a loan. Also, the principal used to finance loans is depositor’s money and not the bank’s money. Thus, the principal needs to be replaced in order to keep the depositor’s money intact. NPAs can have a ripple effect on small banks. Small banks run of low capital infusion and liquidity. More the NPAs, the less the liquidity and capital. But are NPAs avoidable without robust mechanism? Many successive governments had implemented many reforms but failed to curb the root problem. According to statistics, nearly 60,000 bankruptcy cases are pending in Indian courts and it takes 4.3 years for a company to shut down its operations in India. But after 2014, NDA govt has undertaken many good structural reforms and Insolvency and Bankruptcy Code is one such reform. IBC billed as the biggest economic reform in India after the Goods and Services Tax (GST) — is a rare example of a speedy rollout and implementation of a much-needed law. Although it is undergoing an initial period of adjustment and cleaning-up, the law lays down a robust framework and time-bound road map to deal with distressed or failed businesses. India ranks 100th in Ease of doing business and 40th in global competitive index. Both ease of doing business and global competitive index ranking criteria have one parameter in common i.e. resolving insolvency. The law will help in improving ease of doing business by consolidating all the laws dealing with Insolvency and bankruptcy into one single entity. Improvement in rankings of easy of doing business means more investments which means higher growth rate. This only goes on to prove how important curbing insolvency is.

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