Finance Ministry, RBI on The Same Page On Bad Loans

A day after RBI Reserve Bank of India governor Urjit Patel signaled a shift in
the central banks stance towards tackling bad loans, Ashok Lavasa - finance
secretary on Wednesday backed the novel approach, saying that state-run
banks needed to find practical ways out of the stillness in loan growth.

Urjit Patel Speaks:

Patel on Tuesday said that the central bank will be firm and pragmatic in
dealing with the issue of stressed assets at Indias banks, weighed down by
Rs.6.3 trillion of bad loans.
His remarks signaled a more conciliatory approach towards dealing with the
stressed assets after pushing banks aggressively for 2 years to recognize such
assets and keep aside money to cover the default risk.

Ashok Lavasa Speaks:

In an interview, Lavasa said that banks shall have to see how to unscramble
these assets. If they didnt take any decision to resolve these problems, neither

the banks, nor the borrowers nor the project would get benefits. On the
contrary, the three were suffering. So they would have to find practical ways
out of this stagnation, he added. He further continued that the other
pragmatism which was being talked about was that it should not affect their
lending to novel projects. The novel decisions of lending should happen on the
basis of merit, he said.
Lavasa concluded that when RBI governor talked about a pragmatic approach,
he was saying that yes, bad loans was a problem which needed to be resolved
without affecting new credit offtake.
Indias banking system has amassed a huge pile of non-performing loans in
the outcome of an economic deceleration joined with delays in securing
statutory approvals and completing land acquisition, held up many projects,
squeezed corporate cash flows and made it very difficult for the borrowers to
repay loans. RBIs novel approach marks a metamorphism in tone from the
month of December when then governor Raghuram Rajan had said that
banks had till March 2017 to clean up their books completely, practically
setting a deadline.

Lavasas Reaction on the Idea of a Bad Bank:

On being asked whether the idea of a bad bank, which Rajan was opposed to,
was the way out of the bad loan mess, Lavasa replied that it could be a
possible solution, although he was not sure if it was the best one. Such a bank
would take over bad loans from the commercial lenders to clean up their
books. He further added that the problem of bad debts was a real problem. So,
one had to deal with it as one couldnt just wish it away, he said. He ruled out
infusing more capital into banks apart from the Rs.22,915 cr offered to
thirteen public sector lenders.
Lavasa said that at present there was no thinking of increasing that allocation.
They expected banks to go to the market and do what was best possible. On a
possible novel date for the budget after the cabinet decided in the previous
month that would advance it from February end, Lavasa said that the finance
ministry was preparing the budget with an eye on 1st February as the likely
day for its presentation.
Lavasa went on to explain that the final date would be decided by the
government in consultation with the Parliament. He said that they did a

reverse calculation to know when it should be presented so that the amount of

time required for scrutiny and appraisal by the Parliament committee, is
available. This brought them to 1st February, which was subject to change to
an extent of a day or two.
On utilizing the extra Rs.15,000 cr in revenue which is expected to be
mobilized by March-end on the Rs.65,000 cr of black money declared under
the income disclosure scheme, Ashok Lavasa added that the effort would be to
put the money into infrastructure and other sectors to create jobs. He finally
concluded by saying that there were always takers for more resources so
spending this money was not an issue.
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Article Written by
Salman Hashmi