Banking Sector and its Bad Loans

A recent Presidential Ordinance legally empowered the Reserve Bank of India (RBI) to enforce expeditious resolution of non-performing assets (NPAs), aka bad loans, of Indian banks. The problem of Nonperforming Assets (NPAs) of banks has become very grave over a period of time. According to estimates Indian banks, mostly public sector banks like the SBI, are sitting on a pile of over 6.7 Trillion rupees bad loans!

This recent Ordinance gives government a big control over the whole process of resolving NPAs issue. The Indian government can now direct the RBI for the ways in which they want to resolve this issue. This Ordinance, as well as whole demonetization episode and the appointment of government officials on monetary policy committee, shows the increasing trend of control of the present government on the central bank. The whole idea floated by the mainstream economists about the autonomy and independence of the central bank of India RBI is surely a lie. RBI’s website itself very clearly states who is its boss, and I quote from the website, 

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.   (Source: RBI Website)

This clearly shows that the government of India is the owner of the RBI and it has to do what its government owners will tell it to do, period.

Now, the ordinance gives a big discretionary control to the government of India to direct RBI in what ways to resolve bank sector bad loans problem. This mostly means, when the big corporate borrowers of India will default on paying back their loans the government of India, via RBI, will force the bank depositors to foot the bill of NPAs! They will bailout the banks by using depositors’ money. The tax payers will also be on the hook. This has already happened around the world e.g., recently Cyprus.

The real solution of bad loan problem is to liquidate the assets of defaulters, whether they are private or public, and repay the money back to the bank depositors whose original deposits where used by these banks to lend money to these defaulters. And for the long term solution, the central bank of India should be abolished and banking sector should be allowed to compete in the free market. The deposit and loan banking functions of the commercial banks should be separated and a strict 100% reserve standard should be applied. Also,  the monetary standard should be based on commodity money like Gold or Silver instead of fiat paper currency.

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