A bad bank for bad loans, but what about bad people?

"The idea of setting up a centralized public asset management company (PAMC) or 'bad bank' to solve the problem of stressed loans is gathering steam," writes Professor Rohan Chinchwadkar. The Economic Survey 2016-17 called it a public sector rehabilitation agency, or PARA. What is a bad bank? It is a bank, set up by the government, to take over the bad loans of commercial banks at market rates. Since market rates are much lower than the total amount of loans the banks have to show the difference as losses. Most of the bad loans are in public sector, or government banks, which means the taxpayer loses out. How much money are we talking about? Over Rs 6 trillion, or 11% of total loans disbursed. Indian Oversea Bank has gross non-performing assets of 22.42% of total loans. Banks are unable to lend until they resolve their bad loans which means new projects are starved of funds. But the government is not taking the situation urgently, writes Mihir Sharma for Bloomberg. Instead banks are being asked to open millions of zero-balance accounts and give loans to small businesses. An editorial in the Mint has listed examples of bad banks which were successfully used by other countries, including the Troubled Asset Relief Program, or TARP, in the US. Why do government banks have so much bad loans? Because some managers succumb to bribes paid by brokers, employed by crooked business fellows who have no intention of repaying their loans, wrote Tamal Bandopadhyay. To make profits banks lend at rates higher than what they pay to depositors. Managers feel that some big conglomerates are safe because of their size. Some of these conglomerates have loans in excess of Rs 1 trillion. A lot of these business tycoons have friends among politicians. Vijay Mallya was a member of the Rajya Sabha and was disappointed at not being protected by his colleagues. It was a struggle to declare him a 'wilful defaulter', which would bar him from borrowing any more money. Indian politicians see public sector banks as their property and use our money for political gain. The Congress won elections in 2009 by forgiving loans of farmers at a cost of Rs 700 billion. Although it contributed to bad loans in banks and made them reluctant to lend to farmers politicians are again promising to forgive loans to farmers in UP. The Finance Minister is committed to borrowing Rs 3.5 trillion this year and keeping the fiscal deficit at 3.2% of GDP so he is unable to capitalize the bad loans in excess of Rs 6 trillion. Moreover, opposition politicians will accuse the government of crony capitalism if rogue business fellows are seen to be bailed out. Prof Chinchwadkar recommends the setting up of a bad bank along with severe punishment for corrupt borrowers and bank officials. Trouble is they might name politicians and politicians are never punished in India. What if they come to power next time?