Throwing good money after bad?
An interesting method of the Indian government to try to solve the problems related to about 100 billion dollars of bad debts on the books of Indian commercial banks. The plans involve a combination of a government-owned bad debt buyer to operate in tandem with a partly private company that will attempt to sell the assets of the distressed companies (the incentive being that the government will pay the difference between the expected value of the assets and what they are capable of delivering them for).
The difficulties with a more laissez-faire approach are that it can be difficult to persuade banks to tackle bad loans on their balance sheets, with some preferring to wait in the hope that the market improves and their losses. potential are thus minimized or, in the best case, even turned into profits. While these banks may appear to have rich balance sheets, the realizable value of their assets may turn out to be much bleaker. Unrealized reality can also tend to manifest itself in a reluctance to lend more, which can stifle economic growth.
However, the mere fact of state bailout of banks (with over $ 35 billion in Indian taxpayer money having been applied between 2005 and 2009 alone) has not cured the ailment. This underscores the need for a more systemic reconstruction to enable a lending culture that is much more sensitive to the importance of proper due diligence and informed risk analysis – without it, state-led capital injections. (even with the nuanced approach pursued by Indian government) could throw money after evil.
“Banks are generally qualified for loans but not for the collection and resolution of bad debts.”