20 July 22, 2019AD loans or non-perform-
ing assets (NPAs) are in the
news again. The govern-
ment claims that NPAs
have dropped to `8.
crore due to their four R’s
strategy—recognising NPAs transpar-
ently, resolving and recovering value
from stressed accounts and recapitalis-
ing state-run banks. If the government’s
numbers are correct, bad loans as a per-
cent of total loans have dropped from
11.5 percent in March 2018 to 9.3 per-
cent in March 2019 and according to a
CRISIL report, could drop to around
eight percent by March 2020.
While it appears from recent num-
bers that the stress in corporate loans
may have peaked, rating agency India
Ratings estimates that an additional
stock of `2 lakh crore in fresh bad loans
from the infrastructure and power sec-
tors will hit the banking system over the
next one year. There are also signs of
stress building up in the retail loan port-
folios of many banks. The growth in
retail credit over the past three years
(17.8 percent) is not supported by a
commensurate growth in wages (2.
percent) and employment (6 percent).
And, under the radar, there is a growing
build-up of NPAs in loans to medium
and small enterprises, MUDRA loans as
well as Kisan Credit Card loans.
In a recent speech at StanfordUniversity, Urjit Patel, former governor
of RBI, expressed concern over the mag-
nitude of NPAs. He also stated that the
amount of capital put aside as a buffer
against bad loans was “overstated” and
was insufficient to tackle the enormous
stress on the banking system.
NPAs are an immediate and growing
problem for the Indian economy that
has slowed down considerably. The hig -
her the NPAs, the less money banks can
lend because they have to set aside capi-
tal to provision for these bad loans. And
the less money banks have to lend, the
lower the levels of private investment.
This, in turn, leads to a reduction in in -
come, employment and consumption,Taking a leaf from the Federal
Reserve, the RBI should
create `8 lakh crore
electronically and use it to
buy all NPAs. This radical
move will prevent impending
economic depression
Column/ NPA Problem Sanjiv Bhatia
B
which further leads to more NPAs, and
the vicious cycle goes on.
The Indian economy is, therefore,
stuck in a slowdown that results from
this logjam of bad loans. A logjam is
when logs get all twisted and piled up in
the river, preventing the water from
flowing smoothly. For the economy to
grow, this logjam must be cleared, and
the water, which is a metaphor for
money, needs to start flowing again in
the river (the economy).
There are two ways to fix this logjam.
One is the slow and incremental
approach presently deployed through
the Insolvency and Bankruptcy Code
(IBC) and the frequent attempts to
recapitalise the banks. The other way to
open the logjam is to get heavy equip-
ment and clear up all the logs in one fell
swoop. The second approach may be
costlier in the immediate term, but it
cleans up the river quickly and allows
the water to start flowing again.Create New Money
UNIThe credit easing policy that I have
suggested does not take a single penny
from middle class taxpayers who are
being asked to pay for the mess through
frequent government recapitalisations.