Context: There are various factors behind the bad loans in India.
Factors behind bad loan boom in India
Market issues: During 2003-07, real estate, metals, and a few manufacturing and capital goods companies saw a short period of scorching demand growth, which they needed to fund by borrowing large amounts of capital.
Crony relations: Promoters of very questionable intent and competence ran most of these businesses.
Unsurprisingly, these promoters found willing allies in PSB officials with no accountability.
All PSBs were soon competing to dole out thousands of crores of rupees to large infrastructure projects in power, roads, steel, and realty.
Banks including LIC disbursed money without any risk mitigation.
Inordinate delays and cost escalation:
Case of Lanco’s Babandh power project: Initial project cost was Rs 6,930 crore, of which promoters’ contribution was supposed to be 20% with an 80% debt component to come from 14 Indian banks and Life Insurance Corporation.
In March 2015, the project cost was revised to ? 10,430 crore and further to ? 11,949 crore in June 2016. Even in 2019, when Lanco came under a bankruptcy resolution, the project remained incomplete.
Issues in bad loan resolution – Low recovery rates: Lanco’s Badandh power project went for liquidation for a realisation of just Rs 290 crore.
Continuing legal troubles: Contrast this with the fact that the government still refuses to accept Vijay Mallya’s offer to pay back in full.
Conclusion: Governance PSBs shall be strengthened to tackle bad loans problem sustainably.