How long to put up with Non-performing Loans in Banks?

Banks and Rising Bad loans and Losses:
This refers to the edit Rising Loan losses Price of Stimulus( Et Dt,24 May 2011). Banks in India particularly public sector banks have to be run as desired by the Government and the Reserve Bank due to socio economic conditions and the need to uplift weaker segment of the economy. Running banks purely on professional lines and as per the cyclical conditions of the economy is simply ruled out as long as agriculture sector and large segment of the population who remain dependent upon the rural economy remain weak. This results in cross subsidisation in different ways and formation of larger non performing loans (NPLs).

Because of high interest rate on certain loans, lower growth of the economy and preferential type of loans not linked to viability, NPLs of banks increase and the Government comes to final rescue in case of any bail out of banks. Larger NPLs mean more provisions, lower profits, lower deposit rates, lower distribution of dividend affecting all stake holders of banks. NPLs are part and parcel of banks and the only solution to contain the impact of this menace is to have a permanent approach to contain the emergence of NPLs and to ensure that banks do not suffer on account of NPLs.Since the borrowers' poor performance inter -alia is the basic cause for NPLs, it is ideal to have a solution involving borrowers. Rate all the borrowers based on their conduct of operations and levy a small sum from them on the basis of their rating to have a Precautionary Margin Reserve Fund to take care of NPLs. Banks and the Government if necessary can support the fund based on certain criteria in the interests of the institutions and their long term viability.This fund over a period would be sufficient to cover the risks arising out of NPLs.
Dr.T.V.Gopalakrishnan