This one problem is handing like a twin Damocles Sword over India Inc. and Indian banks: the seemingly irreparable and unsolvable crisis of non-performing assets that haunts the Indian banking system. The latest Economic Survey tabled in the Parliament by Finance Minister Arun Jaitley openly admits as much by stating the country has been struggling to solve the "Twin Balance Sheet Problem"- overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis.
The latest Survey is candid enough to admit that the serious NPA crisis is far from being solved: despite many pronouncements made in 2015 and 2016 by the previous RBI Governor Raghuram Rajan that concrete steps were being taken and that the worst would be over by the last quarter of fiscal 2016-17. The Economic Survey admits that the goal remains distant. It says that gross NPAs has climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. At this level, India's NPA ratio is higher than any other major emerging market, with the exception of Russia.
Over the last few days, there has been a furious debate on TV channels regarding allegations that top functionaries of the previous UPA regime deliberately pushed public sector banks to bail out Vijay Mallya and Kingfisher Airlines despite the company defaulting on dues. That Vijay Mallya cocks a snook at Indian banks and the Indian judicial system sitting in London in a way reflects how crony capitalism in the previous decade was the root cause behind the current NPA crisis. The Survey admits as much when it states that some debt repayment problems have been caused by diversion of funds. As public sector banks struggle to clean up their books and balance sheets, their ability to lend money for new projects has been badly affected.
The Survey says, "The consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades. As this has occurred, growth in private and overall investment has turned negative. A decisive resolution is urgently needed before the TBS problem becomes a serious drag on growth."
The Survey admits that private sector asset reconstruction firms and banks have not been able to do the job as originally envisaged. In the event, it calls for the setting up of a state owned agency that will take up the task. It says: Since, private run Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.
Will Arun Jaitley bite the bullet ? If it can't solve the NPA crisis, the Modi regime will not be able to revive private investment. If that happens, re-election in 2019 will become more and more difficult.
