Bad loans problem can't be solved by banks' recapitalisation

There is no "political economy consensus" on tackling the mounting problem of bad loans of banks, which cannot be resolved by their simple recapitalisation, a former head of India`s central bank said on Friday.

"The fact that the overwhelming proportion of non-performing assets (NPAs) are with the public sector banks shows that the reform will have to go much beyond simply recapitalising the banks," former Reserve Bank of India (RBI) Governor Y.V. Reddy said here while delivering the Raja Chelliah Memorial Lecture on "Fiscal-Monetary Policy Interface" organised by National Institute of Public Finance and Policy.

"Besides, professional approach and capacity to evaluate lending proposals and risks cannot be expected in public-owned institutions bailing them out periodically with taxpayers` money," he said.

The magnitude of the problem can be guaged from the NPA figures of state-run banks, which at the end of the current fiscal`s second quarter that ended in September, rose to Rs 6.3 lakh crore, as compared to Rs 5.5 lakh crore at the end of the first quarter.

Elaborating on the issue, Reddy said NPAs are a "balance sheet" problem and, therefore, a "substantive issue".

"Recapitalisation is actually putting resources in an enterprise that does not have the capacity to pay back...ultimately, the risk comes back to the public," he said.

"The cumulative risk to the sovereign because of the real sector and financial sector interface is huge," he added.

Reddy said the "common thread" between fiscal and monetary policies, and the financial sector, are the state-run banks.

"The future of the financial system and the modernisation of the financial sector depends on how we overcome the intractable problems of public sector banks. There seems to be a political economy consensus of for no change or minimal change," he added.