India's Finance Minister Nirmala Sitharaman is likely to announce a slew of banking sector reforms in the upcoming budget to be tabled on 1 February, which may include taking over a $123 billion bad loan.
A source close to the development has suggested to Sputnik that the Finance Ministry is likely to approve the setting up of a separate institution to take over the non-performing assets (NPAs) - the bad debt - from the banks' balance sheets so that they could lend freely and support the needs of the economy.
“Given the gravity of the bad debt situation, the Finance Minister may propose setting up an institution for taking over the bad loans of the banks in the upcoming budget,” the source told Sputnik on condition of anonymity.
The institution - widely referred to as a bad bank - will buy the loans of the commercial banks that have gone bad and free up their balance sheets so they could start lending afresh and fulfil the needs of the economy.
According to a report on Trends and Progress of Banking in India prepared by the country’s national bank, the Reserve Bank of India, in December, the Indian banking sector is saddled with NPAs worth $123.26 billion as of March last year.
The report also points out that until September last year, the total NPAs in India’s banking sector had amounted to 7.5 percent of the total loans and advances.
The national bank had expressed concern in August in its annual report that the sector's bad loans might swell to 14 percent of the total loans and advances.
The source also indicated that the government may announce further capitalisation of public sector banks in the upcoming budget. “The Finance Minister may also pave the way for consolidation of the state-run banks. The number of state-run banks may be brought down to four from 12 at present,” the source added.