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Bad debts are loans that cannot be recovered from borrowers. They are a serious problem for the Indian banking system, which affects its profitability and credit growth. Bad debts have been accumulating over the years due to various reasons, such as:

– Sluggish domestic growth and global financial crisis that affected many projects and businesses⁶
– Crony capitalism and dubious lending practices that favored politically connected or influential borrowers¹
– Inadequate regulation and supervision of banks and borrowers¹
– Lack of transparency and accountability in loan classification and provisioning¹

The historical perspective of bad debts in India can be traced back to the colonial era, when the British government used Indian banks as a source of cheap finance for its imperial projects. After independence, the government nationalized many banks and directed them to lend to priority sectors, such as agriculture and small industries, without proper risk assessment or recovery mechanisms. This led to a rise in bad debts, especially in the public sector banks, which account for more than 60% of the total bad debts¹.

The current situation of bad debts in India is alarming. According to the latest data from the Reserve Bank of India (RBI), the gross non-performing assets (NPAs) ratio of scheduled commercial banks increased to 9.5% in March 2021 from 8.5% in March 2020². This means that out of every 100 rupees lent by banks, 9.5 rupees are not being repaid. The total amount of bad debts in the Indian banking system is estimated to be around $100 billion, or about 4% of India’s GDP¹.

The impact of bad debts on the Indian economy is significant. Bad debts reduce the profitability and capital adequacy of banks, which limits their ability to lend to productive sectors and support economic growth. Bad debts also erode the confidence and trust of depositors, investors, and regulators in the banking system, which can lead to financial instability and contagion. Bad debts also impose a fiscal burden on the government, which has to bail out distressed banks with taxpayers’ money or guarantees¹.

To address the problem of bad debts, the Indian government and the RBI have taken several measures, such as:

– Enacting a bankruptcy law in 2016 that allows for faster resolution and liquidation of stressed assets⁶
– Conducting an asset quality review in 2015-16 that revealed the true extent of bad debts and forced banks to recognize and provision for them⁶
– Infusing capital into public sector banks through recapitalization bonds and budgetary allocations¹
– Setting up a bad bank in 2021 that will acquire and dispose of bad loans from commercial banks¹

These measures have shown some positive results, such as improved recovery rates, lower slippages, and higher credit growth. However, they are not sufficient to solve the problem completely. There are still many challenges and risks ahead, such as:

– The impact of the Covid-19 pandemic on the economy and the borrowers, which could lead to further defaults and stress in the banking system¹
– The legal and operational hurdles in implementing the bankruptcy law and the bad bank model, which could delay or hamper the recovery process⁶⁷
– The moral hazard and governance issues involved in bailing out banks and borrowers, which could encourage reckless lending and borrowing behavior⁶
– The fiscal constraints and political pressures faced by the government, which could limit its ability to provide adequate support to the banking system⁶

Therefore, it is imperative that the Indian authorities continue to monitor and address the issue of bad debts with urgency and prudence. They should also implement structural reforms to improve the efficiency and transparency of the banking system, strengthen the regulation and supervision of banks and borrowers, enhance the credit culture and discipline in the market, and promote financial inclusion and literacy among the public⁶⁷. Only then can India’s banking system become more resilient and supportive of its economic growth.

Source:
(1) An Analysis of Bad Debt Crisis in India – iPleaders. https://blog.ipleaders.in/bad-debt-economy/.
(2) ‘Bad bank’ to clean up India’s $27bn debt mountain – BBC News. https://www.bbc.com/news/world-asia-india-58654740.
(3) BAD DEBT INDIA – The Economic Times. https://economictimes.indiatimes.com/topic/bad-debt-india.
(4) How dire is India’s bad debts problem and what you need to know about it. https://www.managementstudyguide.com/how-dire-is-indias-bad-debts-problem-and-what-you-need-to-know-about-it.htm.
(5) Indian banks face bad loans and credit growth issues in 2021 – Quartz. https://bing.com/search?q=bad+debts+in+India+current+situation.
(6) The growing problem of consumer bad debt in India. https://timesofindia.indiatimes.com/readersblog/loansettlement/the-growing-problem-of-consumer-bad-debt-in-india-40810/.
(7) Is India’s public debt a cause for worry? – The Hindu BusinessLine. https://www.thehindubusinessline.com/opinion/is-indias-public-debt-a-cause-for-worry/article34139146.ece.
(8) The Anatomy of Public Debt Reductions in India. https://casi.sas.upenn.edu/iit/prachimishra-nikhilpatel.
(9) India’s bad debt – an international perspective | Structured Finance In …. https://www.structuredfinanceinbrief.com/2022/04/indias-bad-debt-an-international-perspective/.