India needs to create 'bad bank' quickly - Arvind Subramanian

By Manoj Kumar

NEW DELHI (Reuters) - India's finance ministry on Wednesday backed a call by the Reserve Bank of India to set up an institution similar to a "bad bank," saying urgency was needed to address troubled loans weighing on the banking sector that were hobbling investment and growth.

Arvind Subramanian, the finance ministry's chief economic adviser, said that delaying a cleanup would further reduce private-sector investment and make the problem worse for Asia's third-largest economy.

His comments backed forthright views expressed in a speech on Tuesday by Viral Acharya, the new deputy governor of the RBI, who said India's failure to tackle bad loans was the result of a piecemeal approach that had given "all discretion" to lenders.

"There is very much urgency," Subramanian told a news briefing in New Delhi, adding that the government was in touch with the RBI on the matter.

"The government is looking at it very closely. I think the more you delay the problem more private investment will remain weak. That is, I think, the big cost we face now, and of course, losses of the government keep mounting."

Prime Minister Narendra Modi's government, which is approaching three years in power, has taken little action to strengthen stricken public sector banks that account for around 70 percent of lending in India.

The renewed sense of urgency comes as economic growth slows due to weak credit and investment, as well as the lingering impact of Modi's abolition of 86 percent of the currency in circulation in November in a crackdown on tax evasion and the black economy.

Subramanian has proposed setting up a so-called Public Asset Rehabilitation Agency (PARA) that would handle the biggest, toughest problem loans and take politically difficult decisions to reduce debt.

Banks in India had record stressed loans of $133 billion, or 12.34 percent of their total loans, as of last September.

About two dozen state-owned lenders have an even higher stressed-loan ratio of 15.88 percent, according to data compiled by India's central bank.

In his pre-budget Economic Survey released on Jan. 31, Subramanian said banks might have to write off as much as 75 percent of the amount owed by 57 out of India's top 100 debtors as they could not even afford to pay interest.

"Is there an alternative?" he told reporters. "We know that there is a big problem and we need lot of money, we need a lot of talent, but the heart of the problem is how do you get political cover to write down debt. The public is already on the hook, it is a matter of how quickly you do it and you limit the losses."

(Reporting by Manoj Kumar; Writing by Douglas Busvine; Editing by Rafael Nam)