Will Sudarshan Chakra solve the problem of NPA and Bad Loans?

The state run banks are grappling with bad loans which are increasing day by day. RBI deputy governor, Viral Acharya has proposed ‘Sudarshan Chakra’ to replace government’s Indradhanush Plan which was initiated in 2015.

Recapitalisation: A closer look

The Public Sector Banks in India are severely plagued with the problem of NPA. For keeping the banking system afloat, the government had allocated Rs 70,000 crores that may be infused in the banking system over a period of four years up to 2019 so as to ensure that these banks comply with BASEL-III norms.

The asset quality review of 2015 carried out by the central bank forced the banks to recognize the Non Performing Assets and set aside provisions for the same. This resulted in exponential increase in bad loans nearing Rs 8.3 lakhs crore by June.

In the aftermath of these governance reforms in the banking system, there arose the need of adequate recapitalization so as to overcome the burden of stressed assets. Countries like Japan and other European countries have used various mechanisms to bail out their banks. But Indian story is different and so are the needs of recapitalization.

The Means and The End

A lot of efforts have been put in to strengthen the Indian banking system. Some of these measures have worked well like the Indradhanush scheme. But the times are changing and so the deputy governor has suggested Sudarshan Chakra to cater to present day requirements.

Public Sector Banks that are under capitalised have the capital reserves that barely enable the bank to survive and not grow. In such an event, banks tend to focus on high interest margins at the cost of high loan volumes. Thus resulting in weak loan supply in the marketplace.

The government and the banking regulator has multiple options to deal with this problem but what is critical is the rate of reforms. It is learnt that the central bank is working in close association with the government to devise newer ways of recapitalization which may involve an array of measures like mergers among others.