Union Finance Minister Shri Arun Jaitley presented the Economic Survey
2016-17 in the Parliament today. The Survey shows that our country has
been trying to solve its ‘Twin Balance Sheet’(TBS) problem –
overleveraged companies and bad-loan-encumbered banks, a legacy of the
boom years around the Global Financial Crisis. So far, there has been
limited success. The problem has consequently continued to fester:
Non-Performing Assets (NPAs) of the banking system (and especially
public sector banks) keep increasing, while credit and investment keep
falling. Now it is time to consider a different approach – a centralised
Public Sector Asset Rehabilitation Agency (PARA) that could take charge
of the largest, most difficult cases, and make politically tough
decisions to reduce debt.
As per the Survey, gross
NPAs has 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 TBS problem becomes a serious
drag on growth.
The Survey reaches to the conclusion that a PARA may be necessary
discussion of the bad loan problem has focused on bank capital. But far
more problematic is finding a way to resolve the bad debts in the first
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.
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.
them to financial health will require large write-downs.
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.
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.
private run Asset Reconstruction Companies (ARCs) have not been
successful either in resolving bad debts, though international
experience (especially that of East Asian economies) shows 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.