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Bad Debt Crisis in Banking Sector of India

Bad Debt Crisis in Banking Sector of India

Indias NPA - Bad Debt Crisis in Banking Sectors

Bad debt is a debt which cannot be collected and therefore it is meaningless to the creditor. When a debtor becomes bankrupt or the cost of debt collection charges more than the amount of debt, it is considered as the bad debt. At present, there are almost 4.5 lakh crores bad debt at stake in the PSU banks. Due to this, PSU banks are suffering through a crisis

Reasons of Increasing Bad Loans:

  • According to the research by RBI, mainly 5 sub-sectors, infrastructure (i.e. telecommunication, roads, ports, airport, railways and other infrastructures), iron and steel, textiles, mining and aviation services have played major role in this enhancement of bad debts. 
  • The increasing uncertainty of global market and slow rate of recovery in markets can cause this kind of adverse condition. The slow moving domestic growth rate is another reason of it. There are also many other factors. Environmental permits, which are delayed, can affect the power, steel and iron sector. Various mining projects are banned due to these environmental issues. Delay in collection and lending without proper thinking are also causing bad debt.

Disadvantages of Bad Debt in Indian Economy:

  • The increasing amount of NPA(Non Performing Assets) is an indicator of the poor condition of Indian Economy. Out of the 26 PSU banks, 19 banks have reported about 5% or more gross NPAs. To grow effectively, a bank needs to raise fresh capitals. High NPA causes many problems in stock market. The poor valuation in a stock market can affect the ability of a bank to raise funds for growth. Due to insufficient fund, they can't get additional loans. On the other hand, the private sector Banks are performing well to manage the risks. As both of the banks operate under same economic condition, the practices of risk management should be in the priority list of the PSU banks.

Steps Must Be Taken By the PSU Banks:

  • The bank must take quick steps to identify and resolve the issues of stressed assets. Bank should offer loan on the basis of some objectives being complete transparent without any favour or fear.
  • The PSU Banks should form a board level committee to monitor the recovery procedure. Best and experienced officers must be hired as the heads of zonal offices. 
  • Some rules and regulations must be followed. Special Asset recovery drives, early warning related guidelines formation, appointment of special authorized officers must be done. As well as, the other norms must be tightened for the ARCs. The bankruptcy law should be passed and a debt recovery tribunal must be formed quickly.

View of Banks Board Bureau (BBB) Regarding Bad Debt:

  • BBB Chairman Vinod Rai has assured that some progress is already there in resolving bad debts. Bank management want to be strict to its policies as the burden of NPA can make a bad impact on national economy. 
  • According to him, the bank must push the slow credit expansion to fetch private investors. Bank executives must be active to resolve the bad debt problem from the root. 
  • They must be fair enough while issuing loans to the big corporate houses. BBB has already asked help from Central Vigilance Commission and CBI to perform scrutiny over bad loans.  An overseeing committee is also formed to help the bank to deal with bad debt problems after discussing with RBI.
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