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COURSE TOPIC THE HINDU EDITORIAL TIMES II JUNE 2018
TITLE NO EASY SOLUTIONS
HEADLINE A 'bad bank' is not a magic bullet; tackling NPAs requires other structural reforms as well
NO EASY SOLUTIONS Union Minister Piyush Goyal, currently in charge of the Finance Ministry, has announced the formation of a committee to assess the idea of special asset reconstruction companies or asset management companies to take over bad loans from banks. The bankers'panel has been given two weeks to revert. The idea of a 'bad bank' is not new. Chief Economic Adviser Arvind Subramanian had suggested the creation of a Public Sector Asset Rehabilitation Agency (PARA) to deal with what he described as India's "festering twin balance sheet problem"
NO EASY SOLUTIONS By this he meant over-leveraged corporates unable to service debt or invest afresh, and banks hit by non-performing assets (NPAs) cagey about fresh lending. This overhang hurts new investments and continues to dent India's medium-term growth and job creation prospects. A professionally-run PARA, or the so-called 'bad bank, could assume custody of the largest and most difficult-to-resolve NPAs from lenders'balance sheets. This would allow banks to focus on extending fresh credit and supporting the pick-up in growth.
NO EASY SOLUTIONS But there are good reasons why the Finance Ministry left the bad bank idea in the cold over the past year and a half - among them the fact that the new entity would need a lot of capital support, just as banks do. Some of this was envisaged as coming from the Reserve Bank of India through a complicated transaction. After a long debate within government, under Finance Minister Arun Jaitley, it was noted that setting up a new institution would be very timeconsuming and there would be challenges on its ownership structure as well as the pricing of bad loans taken over from banks
NO EASY SOLUTIONS As former RBI Governor Raghuram Rajan had pointed out, a government-owned bad bank could still face scrutiny from the Comptroller and Auditor General and the Central Vigilance Commissioner. Whether or not the knots in the bad bank idea are sorted out, the government should focus on other reforms as well. One, amend the Prevention of Corruption Act to shield bankers and officers from investigative witch-hunts Two, back bankers to take demonstrable action against wilful defaulters. And three, take a hard look at what ails the Insolvency and Bankruptcy Code
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