Financial Discipline and ethical deficit cannot go together.

Lasting Solution to NPAs

The only solution to Bad loans in banks is to Prevent Formation of bad loans than to find ways and means to recover the bad loans by spending more than the loans themselves involving tax payers’ money. Now what is identified as bad loans needs to be frozen and recovered by enforcing the existing laws of the land without any fear or favor and bringing in the Bankruptcy Code at the earliest. Loans turn bad because of several reasons and the major reason is the non professional approach of banks to favor the unqualified borrowers and encourage them ignoring the basic principles of lending and disciplining them from the day the loans are sanctioned. Instead of the suggested proposal to have a Stressed   Fund by the Ministry of Finance and the RBI,  is it not  ideal to have a Stressed Assets Prevention Fund by levying a penalty both from the erring banks and borrowers minimise generation of bad debts and liquidate the bad debts in case formed by the banks and the borrwers themselves without disturbing the other stakeholderrs?  This fund over a period would be more than the generation of bad loans and would be helpful to liquidate the bad loans without affecting the budgetary resources and depositors’ interests. The solution in the long run should be to discipline the borrowers, educate them to run the business on professional lines with ethics and make the banks also accountable and sensitive to the trusts and responsibilities vested in them. In this regard the practical solution suggested in one of the books Viz Management of Non Performing Loans in Public Sector banks  published by the Indian Institution of Banking and Finance way back in 2004 can bring in discipline among the borrowers and banks as well and find the required funds to liquidate the bad bebts without taxing the tax payers and depositors. The very acceptance of the solution eludes even the debatable stage despite having it been widely circulated among the top bankers , RBI and the Finance Ministry is a mystery.The bad debts accummulate due to ethical deficit among other things  is a fact which cannot be ignored any more  and the solution lies only in effective Governace.    

 Dr T V Gopalakrishnan