"IF YOU owe a bank a hundred dollars, it is your problem. If you owe a hundred million, it is the bank’s problem. If you are one of many tycoons borrowing billions to finance dud firms, it is the government’s problem.
That is roughly the situation India finds itself in today. " - Economist.com
As originally feared, the game of pretending that the bad loan problem will disappear beyond the horizon on one fine sunny morning has come to nought- it always does- Japan 1980-90, China late 1990's, Spain 2010. The mega Bank recapitalization funded by the Tax payers of India in favour of ailing Public Sector Banks has been a part of this perpetual 'pretending to see the horizon' mode that has engulfed hapless policymakers- but alas, not even 3 quarters have elapsed and all the money is 'gone'; even before it has actually come in!
Now we are at another decision point. After already having made the folly of extending and pretending, India is again pondering the future course of action as far as bad loans in concerned.
Gentle reader, may I be provided the liberty of immodestly reminding thou, that way back in September 2015, this oft ignored & mostly ignoramus blogger had published "Urgency of Creating a Bad Bank or The National Asset Management Co.(NAMCO)" on this very blog.
I confess that there is no forum, no opportunity lost in all feasible forms of human expression - written word, spoken expression- that has not been used by this author to receptive compatriots: the extreme urgency of examining similar balance sheet problems in Germany (1980s), China (1990s), Sweden(1992),Ireland(2009),Netherlands(2011), Spain(2012), Portugal(2014), Latvia(2010) and seeing for themselves the great efficacy with which the bad bank concept was employed by these nations to resolve the issue.
This requires great honesty to admit that if more than 20% of the Banking system loans are non-performing and if on an average a 50% haircut is required, then more then 10% -i.e. bank capital has been already wiped out- which means that the Banking system in India is essentially insolvent. We can continue this process of recapitalization by some hapless source of equity- the taxpayer, say- who will continue to face a repeat of the latest fate of vanishing wealth and utility. When the same folly has been tried over and over again, there will be a point when the public will ultimately rebel and question the wisdom of those in charge of public deposits in a manner that may not be very pleasant to countenance.
It is therefore, now a matter of not just extreme urgency; for that point has long passed- a matter of recovering that last shred of public faith in the system before chaos sets in- that we examine why so many nations with balance sheet problems have hit on the same solution - bad bank - to resolve their non performing asset problem.
A painful surgery -amputation- with some hope to survive is obviously better than a gangrened and decaying corpse.
Urgency of Creating a Bad Bank or The National Asset Management Co.(NAMCO)
8 September 2015
Talk of a Bad Bank in India- Economist
2 March 2017
The beginning of a blueprint of a bad bank in India- FT- David Keohane
3 March 2017