Bad Bank, Good Intentions And Bad Lending

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.