New Delhi: Reducing the mountain of bad loans that has crimped public sector banks’ ability to lend, and reviving private investment will be the top priorities of the Prime Minister Narendra Modi-led National Democratic Alliance (NDA) government in the remaining two years of its term, finance minister Arun Jaitley said on Thursday.
Action will start in the next few days on bad loan resolution under an ordinance put in place in May to amend the Banking Regulation Act, Jaitley said at a media briefing to mark three years of Modi government. The ordinance empowered the Reserve Bank of India (RBI) to intervene directly to clean up bad loans.
“It (bad loan pile-up) is a major challenge because it affects the banking sector’s capacity to support growth,” Jaitley said. “Linked to it is the challenge of increasing private sector investment, even though our FDI (foreign direct investment) and public sector investment have significantly increased.”
India’s banks have piled up Rs9 trillion of bad loans. Rating company Moody’s Investors Service said on Thursday that recent government measures to address non-performing assets (NPAs) and the promulgation of the Insolvency and Bankruptcy Code 2016 are credit positive for India’s sovereign ratings, as they provide a clearer framework for bad-loan resolution.
“However, outstanding structural issues remain within public sector undertakings (PSUs). Until NPAs are resolved, banks’ ability to finance potential investment will be constrained,” it said.
Jaitley said the steps to be taken by lenders under the bankruptcy process would be left to the commercial wisdom of banks and that this process does not absolve defaulters of their liability to pay.
Last month’s ordinance empowered RBI to coax lenders and borrowers into taking debt write-downs. The reluctance of banks to sacrifice a part of the money owed to them by debtors has hindered the process of bad-loan resolution.
At the media briefing, Jaitley also spoke about the 8 November demonetisation move, which he said had created a ‘new normal’, helped curb the shadow economy and yielded three distinct advantages.
“First, there has been greater movement towards digitization; second, taxpayer base has increased, which is evident from the 18% growth in revenue in 2016-17; and thirdly, a message has gone (out) loud and clear that it is no longer safe to deal in cash,” he said.
On the slowdown in economic growth in the March quarter to 6.1% post-demonetisation from 7% in the three months to December, Jaitley said a combination of factors, rather than the note ban alone, could have been at work.
“There was some slowdown visible given the global and domestic situation even prior to demonetisation last year. In the current global situation, 7-8% growth, which is at the moment the Indian normal, is fairly reasonable by our own standards and very good by global standards,” he said.
Former finance minister and Congress politician P. Chidambaram said the March-quarter slowdown testified to the deleterious effect of demonetisation. “The economy was slowing down in the middle of 2016. Instead of taking corrective measures, government came up with the extraordinarily foolish measure of demonetization and that has set back the economy even further,” Chidambaram said in a video statement.
Anuja contributed to this story.