Centre Mulls Over 3-Pronged Strategy to Curb Bad Loans In Banking System

New Delhi: The Centre is exploring ways to curb bad loans component in the domestic banking system. The alarmingly increasing volume of bad loans has become the single biggest hurdle in the way of an investment revival that country needs to take the growth to the next level. As part of the latest exercise, the Centre is considering three possible strategies to bring down the bad loans.

The strategy includes asset swaps, a bank-by-bank cleanup and a bad bank. The latest 0.7 per cent contraction in the index of industrial production (IIP) in August further supports this view. The gross non-performing assets (NPAs) of scheduled commercial banks rose to 8.7 per cent of total credit by the end of June compared with 4.6 per cent in March 2015 and 7.8 per cent in March 2016.

The Union Finance Ministry is thinking of reviving capital flow to private players.Unless there's a solution to rising bad loans, capital flow can't be ensured, said a senior official.

India is the world’s fastest-growing major economy and its expansion is being supported by consumption and public spending with private investment. However, the public investment is lagging behind despite various reforms being undertaken by the Narendra Modi government.

Reserve Bank of India (RBI) forecasts the gross NPA ratio at 8.5 per cent by March 2017. Rising bad loans are forcing banks to set aside more and more funds to cover potential losses. The increasing NPAs are badly impacting the earnings and preventing them from passing on rate cuts by RBI or stepping up lending.