Union Budget 2021-22 is expected to provide a road map to the banking sector to help it tackle rising bad loans, characterised in banking parlance as non-performing assets (NPAs). The measures being considered by the finance ministry include setting up of bad banks, strengthening Asset Reconstruction Companies (ARC), recapitalising public sector banks and reducing government stakes in some of the banks.

As the pandemic wrecked havoc on the economy leading to job losses, borrowers delayed repayments or failed to repay altogether. Finance minister Nirmala Sitharaman would have to come up with solutions to deal with the issues affecting the banking sector.

Officials in North Block are looking at different options to address the issue.

“There have been several suggestions relating to the banking sector…. don’t think it would be a one-stop solution, but would be a mix of many things or combination of two or three of them. Each has its own advantages and shortfalls,” sources said.

Several economists have argued the government would simply transfer the bad loan problem to another entity, leaving banks to continue making poor loan decisions in the future, sometimes under pressure from the political leadership.

Industry association CII has suggested that the government create multiple bad banks by allowing alternate investment funds (AIFs) to buy bad loans.

The finance ministry has been toying with the idea of a bad bank since it was first tossed up by the then chief economic adviser Arvind Subramanian in the Economic Survey 2017.

The ministry is also looking at the suggestion of bringing down government stake in public sector banks to below 50 per cent through the market route over the next 12 months, except for three to four large lenders such as the State Bank of India, Bank of Baroda and Union Bank.

Rajan views

Former RBI governor Raghuram Rajan says the government should take advantage of the peaks in the Indian equity markets right now and sell stakes in public sector units while prioritising spending to get the economy back on track.

The upcoming budget for the fiscal beginning April 1 should look to provide “relief to the poorer households and small and medium enterprises”, he said. It could then move on to getting the economy back on track.