Preventing another toxic bank loans crisis

One has to pity Indian banks. After living in denial for years, they just completed a massive clean-up of toxic loans only to be greeted with another bout of bad luck. The pandemic and the subsequent lockdown led to a six-month debt and interest repayment holiday, which is yet to end, but the RBI’s Financial Stability Report (FSR) has already bugled a warning of an incoming bad loans avalanche. It pegged FY21 gross NPAs to nearly double to 14.7% from 8.5% in FY20.

For now it’s only a startling estimate, but if it does come to that, then all the pain will be back on the banks’ books in no time. Be that as it may, the industry, government and banks are batting for a loan restructuring scheme for stressed assets despite recent knowledge that such forbearances in the past were what caused the NPA mess in the first place. Needless to say, a blanket restructuring will wipe out all the gains and banks will be back to where they began in 2015. 

Lenders want to restructure to keep loan accounts standard, but delaying NPA recognition and provisioning amounts to evergreening. Borrowers want to modify repayment terms in order to gain time until normalcy is restored, but differentiating genuine accounts from others will be both key and difficult. The government too favours such a move as key sectors like real estate and hospitality are in bad shape and in need of rescue. 

How can we tide over this crisis? Some believe a case-by-case restructuring will help cut the chaff from the wheat, though it’s both time-consuming and carries an element of bias. The FSR also raises the need for bank capitalisation, which the government should embark on without delay. Be it through bonds or from the market, there’s literally no time to lose as only well-capitalised banks should do business. Lastly, the one-year ban on the Insolvency and Bankruptcy Code should be revoked as it delays debt resolution, preventing bank lenders from finding buyers for stressed assets.