Amid a debate on need for a ‘bad bank’ to tackle mounting NPAs, eminent banker Deepak Parekh has said “it is time to bite the bullet” but cautioned against any such move being seen as a government bailout using the taxpayers’ money.

Besides, a clean-up by the government should not signal that errant borrowers can get away with defaulting on their loans, the veteran industry leader said.

Asserting that India’s macro-economic parameters have never been more robust, Parekh said the ‘twin balance sheet problem’ — a lethal combination of stressed corporate and stressed bank balance sheets — is worrisome and if private investment, which is stuck in a vicious cycle, does not pick up, India’s true growth potential will not be attained.

Delivering a keynote address on financial reforms at the LSE Students’ Union India Forum over the weekend, he said a big challenge for India is resolving non-performing loans.

Several schemes

He said there have been several attempts and schemes to resolve NPA problems such as flexible refinancing of infrastructure, asset reconstruction and debt restructuring which converts part of the debt into equity.

“The Asset Quality Review initiated by the RBI at least forced banks to disclose the true state of their non-performing assets. Unfortunately, all these efforts have yielded very limited results. Resolution in India is complex, tedious and time consuming. Barring retail finance, credit growth has dropped to historically low levels.”

Parekh said it is not uncommon to see banks falling into crises world over and the method adopted in most countries to resolve that has entailed a ‘carve out’ of non-performing assets, recapitalisation or a combination of the two.

Talking about the debate on what path India should take to resolve troubled assets in banking system, he said the public sector banks account for three-fourths of India’s banking assets and these banks have largely borne the brunt of NPA accumulation on their books.

Gross non-performing assets are now estimated at 11.2 per cent for PSU banks, while for private sector banks gross NPAs stand at 3.5 per cent, he said.

Key options

Parekh, Chairman of financial services giant HDFC, said there could be four key options to deal with the problem — enhancing regulatory forbearance, capital infusion, consolidation and transferring assets off the banks’ books.

Terming the first one as the simplest method, Parekh said it is also akin to kicking the can down the road and therefore it won’t solve the inherent problem. On capital infusion, he said it was necessary to meet the Basel III requirements but the government had limited resources and for “various sensitive issues involved, it is not looking at the option of privatisation of PSU banks“.

However, if banks are not well capitalised, they will not be in a position to tap the market and raise further resources from other investors. But merely capitalising banks does not address the fundamental issue of bad loans,” he said.

On consolidation, Parekh said India has always had too many small banks when what we need is a few large banks.

“An option to resolve NPAs could be to perhaps look at merging a strong bank with a weak bank. However, this needs to be done very selectively because there could be a likelihood of the strong bank getting dragged down as well,” he said.

SBI merger

Parekh said the proposed merger of SBI with five of its associates was a good initiative as it would become one among the top 50 banks globally in terms of asset size, but there remain immense challenges in terms of actual integration.

On the “most debated” option of transferring assets off the books of the banks, Parekh said it makes imminent sense, but much thought still needs to be put in on the optimum structure and design.

Calling for a debate, Parekh said it needs to be discussed which structure would be more suitable — an asset management company or a bad bank and whether the majority stake should be held by the government or the private sector.

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