Mar 112017
 

RBI Targets Toxic Loans

There is an issue plaguing the banking sector which was slowly killing the economy of the country. Yes, we are talking about uncontrolled lending. It seems like the banks have lent relentlessly and this is causing them to accumulate a lot of NPAs. These Non Performing Assets are not generating enough revenue for the banks to fulfill the lending crisis. This is where RBI has stepped in.

India is right now in a dire need to revive private investment. In face of such a crisis, when the country has $133 billion stressed assets, things are definitely serious. The new RBI governor, Viral Acharya suggested a new type of institution called “bad bank” loan. He proposed that the buying and restricting of the bad loans be conducted from this place.

He also mentioned that he is going to propose a “tough love” style approach towards the banks from now onwards. This is because he is working towards the benefit of the banks but since the banks have been reckless towards lending in the past, he is most likely to take up the role of the parent that puts such regulations in place.

What are experts saying?

The experts who are also colleagues of Acharya have had the following things to say –

  • KV Subramanian, an associate professor at Indian School of Business has said that Acharya seems to be taking the same route that Raghuram Rajan took. He is ready to call things out.
  • This approach, he mentioned, will help the economy as this will not brush the problems under the carpet. This will also help the country move towards a progressing economy.
  • He also mentioned that the banking sector is “incredibly distressed.” It is therefore necessary to take the necessary steps to make banking sector channel their distressed loans so that they can prosper again.

Immediate Concerns

Acharya did mention that if the country failed to act right now it could face the same consequences that Japan faced. Right now the issues surmounting India are not as critical as they are thought to be. But if things are not held in a reign, then these woes will translate into a crisis, according to Acharya.

He proposed that the public as well as the private sectors buy these distressed assets and restructure them again. Acharya didn’t fail to mention that the defaulters were having a “field day” by avoiding repayment of the loans. Even the banks were not concerned about getting back these loans. Therefore his proposals could seem like “incentives.” If any bank or defaulter refuses to implement these plans then they can also be forced upon them.

Acharya’s plan could work, only if it is implemented successfully.

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