To tackle with the problems of increasing Non-Performing Assets (NPAs) of the banking system and declining credit and investment, the Economic Survey 2016-17 on Tuesday recommended a centralised Public Sector Asset Rehabilitation Agency (PARA) to look at the “largest, most difficult cases, and make politically tough decisions to reduce debt.”
As per the Survey, gross NPAs have climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. At this level, India’s NPA ratio is higher than any other major emerging market, with the exception of Russia.
“The consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades. As this has occurred, growth in private and overall investment has turned negative. A decisive resolution is urgently needed before the ‘Twin Balance Sheet’ problem becomes a serious drag on growth,” an official statement said.
Enlisting the reasons, the Survey said that while public discussion of the bad loan problem has focused on bank capital, a far more problematic issue is that of finding a way to resolve the bad debts.
“Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong,” it said.
This concentration creates a challenge since large cases are difficult to resolve, but also an opportunity since TBS could be overcome by solving a relatively small number of cases, it said, adding that restoring them to financial health will require large write-downs.
“Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. And they find it hard –financially and politically—to grant them sizeable debt reductions, or to take them over and sell them…It increases the costs to the government since bad debts of the state banks keep rising, and increases the costs to the economy, by hindering credit, investment, and therefore growth,” it said.
It also contended that a professionally-run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.