Go-ahead for ‘bad bank’

THE government’s decision to set up a ‘bad bank’ ahead of the Union Budget for the resolution of stressed assets, besides help in lending to productive sectors, is an innovative step subject to its smooth and non-partisan implementation. Banks in the country have seen their capital held up by way of NPAs and defaulting on loans has occurred with regularity, putting pressure on the functioning of banks and hindering their operations. As of now, the newly created bank will commence operations with only 15 cases to be transferred by March 31 and their number is expected to go up gradually in the days ahead.

Banks and NBFCs have had a number of reasons for the increase in cases of loan default. The liberal lending to the individual borrowers and corporates to accelerate development without adequate assessment in any case is fraught with risks. Bank runs and big borrowers defaulting on loan repayment have not brought credit to the banking sector either. The loss of income and livelihoods amid the pandemic only worsened the situation with moratoriums and write-offs being resorted to in order to improve the situation. The banking sector has seen major changes, including the merger of public sector banks which was aimed at increasing capitalisation and competitiveness.

The proposed ‘bad bank’ will have a structure for asset reconstruction and debt resolution in which both public sector and private sector banks will have a role to play. Banks cannot do away with lending for without that economic activity and entrepreneurial spirit will suffer. But the onus of managing their own capital and making the lender accountable also lies on them. Loan recovery should not slacken due to the lure of higher interests. While checks are performed, loan defaults point to the fact that proper credit rating and risk assessment are required. Lending in the aftermath of the pandemic will be required to boost economic activities but safeguarding the capital and assets of banks, individuals and companies will also be a must for the economy to flourish without hitches.

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