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Noting that it was public investment that had enabled the country to consistently achieve over 7 per cent growth at a time of dismal private investment, Finance Minister Arun Jaitley said on Thursday the government is bringing all possible resources to bear in order to resolve the issue of banks' bad loans.
Participating in a short-duration discussion in the Rajya Sabha on the state of the economy, Jaitley said that it was reckless lending by banks during the boom years in the previous UPA government that had led to accumulation of such huge non-performing assets (NPAs), or bad loans, in the Indian banking system.
"As regards the banking system, we are trying to put all our resources into it (NPAs issue)," he said.
"Industry doesn't pay back the banks... so this bailout that we're doing with the taxpayers' money is not an ideal situation."
Referring to the Rs 2.12 lakh crore recapitalisation plan for state-run banks approved by the government in October, the Finance Minister said the objective is to ensure that the lenders' ability to support growth is not impacted by their combined NPAs which have crossed the staggering level of Rs 7.5 lakh crore.
"Reckless lending without proper risk management has affected the banks capacity to support growth," he said, referring to the high-growth period after 2008 when the massive lending by banks is now being reflected in their accumulated bad loans and through heavily leveraged corporate balance sheets.
"This is another reason which has contributed to the reduced private investment," he added.
Last week, Jaitley told the Lok Sabha that banks and creditors would need to take a "haircut" on their bad loans, even as defaulting promoters could make their businesses operational again by paying the outstanding interest on the loan.
A haircut signifies lenders accepting a lower than market value for the asset in question for a resolution of the NPA.
In this connection, Jaitley said the government had brought in the Insolvency and Bankruptcy Code in 2016 to institute a time-bound insolvency resolution process.
According to the American rating agency S&P-owned Crisil, Indian banks will need to take a haircut of up to 60 per cent on their bad loans to resolve the issue of NPAS, which is holding up higher economic growth.
The government has embarked on a two-pronged strategy in this regard. On the one hand, it has brought in the Insolvency and Bankruptcy Code which provides for a time-bound insolvency resolution process. On the other hand, it has approved a major recapitalisation plan for state-run banks.