Column/ NPA Problem/ Sanjiv Bhatia
22 July 22, 2019
the government controls 70 percent of
the banking resources and where banks
are forced to invest 40 percent of their
capital in government securities. Also,
by being able to borrow from the banks
at zero percent, the government would
save on interest costs.
What effect will issuing `8 lakh
crore of new money have on the balance
sheet of the RBI? The book of bad loans
will be transferred from the balance
sheet of the banks to the RBI balance
sheet. The loan recovery process could
continue as usual through the IBC and
negotiated settlements. But as the RBI
does not lend directly to the public, its
balance sheet is not as critical to the
lending-investment cycle as that of a
commercial bank. The issuance of new
money will increase the liabilities on
the RBI balance sheet, which will be
offset by the uncollected loans on the
asset side.
What happens if the bad loans that
the RBI bought don’t get repaid or get
repaid with large haircuts? The RBI typ-
ically turns over its profits to the Indian
government. If it loses money on some
investments, it will turn less profit over
to the government. As the RBI has an
unlimited balance sheet, it is not under
any time pressure to rush the loan
recovery process. This will likely
increase the recovered amounts by
allowing for a better evaluation of the
underlying assets. The Federal Reserve
Bank made a profit of almost $50 bil-
lion from the bad mortgage loans it
bought from US banks in 2008.
Over the long-term, the beneficial
effects from the growth of the economy
will likely far outweigh the negative
impact on the RBI’s balance sheet. From
the government’s (and taxpayer’s) per-
spective, a potential loss to the excheq-
uer from not receiving RBI’s share of
profits will be compensated by the abili-
ty to finance infrastructure development
at zero interest rates.T
he NPA logjam needs to be clea -
red urgently to jump-start the
economy. If this vicious cycle of
bad loans and weak private investment
gains momentum, India could find itself
reeling into an economic depression wit -
h in the next 12 months. India has not
had a recession in 40 years and the ma -
ndarins in Delhi are not equipped to
handle one if it happens. Economic his-
tory is clear in its lessons: business and
credit cycles have momentum, and the
cascading impact of fear and uncertain-
ty on business investment and personal
consumption can escalate into a crisis
very quickly.
The credit cycle must be revived
immediately and I have suggested a way
to resolve the NPA problem quickly and
effectively while at the same time pro-
viding much-needed capital for infra-
structure spending. I call it credit easing
instead of quantitative easing because
the objective is not to increase con-sumption by “dropping money from a
helicopter” but to expand credit avail-
ability and increase private investment.
There is only a limited amount that the
government can do to reverse the dip in
economic growth. Lowering interest
rates alone, even down to zero, won’t
work and fiscal stimulus without tax
cuts won’t work either. The only way to
get the economy moving again is
through credit expansion.
Private investment is the biggest con-
tributor to economic growth. Recent
studies by the IMF and Bank for
International Settlements document a
strong causality between increasing
NPAs and declining private investment
across a broad cross-section of coun-
tries. Credit easing will clean up the
banks’ balance sheets, expand credit and
create a cycle of increased investment,
higher growth, rising incomes and
greater consumption. Yes, there is a risk
of a moderate rise in inflation from cre -
dit easing. But the economy risks grea -
ter damage from continuing with the
current approach of trying to clear the
logjam slowly with recapitalisations and
an overburdened bankruptcy court.
The credit easing policy that I have
suggested solves three problems simul-
taneously: Firstly, it helps banks clean
up their balance sheets and get rid of
their bad loans in one fell swoop with-
out the laborious process of insolvency
courts; secondly, it provides the govern-
ment with interest-free money for
much-needed infrastructure projects;
thirdly, it remonetises the economy by
injecting new money.
And it does all this without taking a
single penny from middle-class taxpay-
ers who are not responsible for the
banking problem but are being asked to
pay for it through these frequent gov-
ernment recapitalisations.—The writer is a financial economist
and founder, contractwithindia.comTwitter: @indialegalmedia
Website: http://www.indialegallive.com
Contact: [email protected]In a recent speech
at Stanford
University, Urjit
Patel, former
governor of RBI,
stated that the
amount of capital
put aside as a buffer
against bad loans
was “overstated”
and insufficient.