Wednesday, June 7, 2017

Can central bank stem NPA rot?

This was published in the DNA on the 29th of May 2017

Indian banking is often in the news — sometimes as entertainment (around high-profile failed airline promoters), but mostly serious. The government’s recent NPA Resolution Amendment to the Banking Regulation Act is a serious development, which comes not a day too soon. NPAs now, at nearly Rs 9.6 lakh crore, account for 15 per cent of all bank loans and constitute a serious bottleneck to growth. However, is it kosher for RBI, as does the Central Bank (CB), to get operationally involved in the resolution of NPAs? And, is it enough?
The short answer to the first question is, absolutely. The puritan argument is that it represents a conflict of interest for the CB. A regulator cannot be seen to be resolving what is essentially a commercial decision of a regulated entity. However, taken to its natural conclusion, this approach will result in the banking industry proving the old chestnut “operation successful, patient died”. Ergo, CBs often get involved. The Bank of Japan (BoJ) recapitaliSing Japanese banks in the late 1990’s, US Fed acting as a lead arranger of rescue finance for LTCM in 1998 and the US Fed (2008) buyback of $1.5 trillion of distressed mortgage securities — these are but a few recent instances of active CB involvement in bank bailouts. In short, this is par for the course.
Now, for the second (and real) question — is it enough? A basic background first.
What are the basic steps involved in resolving a bad loan (NPA) issue? It normally consists of three basic rules:
Firstly, recognising the bad loan. Secondly, estimating and affecting a haircut on the loan, either to make the underlying business viable or to sell off the loan, and thirdly, generating capital to absorb the haircut.
Over the last few years, RBI has done stellar work in recognising NPAs. However, it is in the resolution of these loans where the ball got stuck.
First, thanks to the scourge of the 3 Cs (CBI, CAG, CVC), PSB bankers have been loathe to structuring haircuts for any loan gone bad. Arrests of senior bankers (including an ex-chairman of IDBI Bank) have further queered the pitch. Second, a limited tenure of most PSB bankers have meant that they have found it easier to simply evergreen the loans. In simple parlance, leave the problem for their successors. As a result, a stressed loan of (say) 100, after unpaid interest, interest on interest, fines on delays, balloons up to 200 or more by the time someone starts taking action.
This is where the new Ordinance helps. With this, bankers have received RBI cover to take decisions. RBI has a high (and deserved) reputation of integrity and professionalism. Haircuts agreed to by bankers under the direction, supervision and operational monitoring of RBI are unlikely to invite allegations of personal corruption that they could otherwise. While the process is still complex, with relatively few cases accounting for the bulk of bad loans (the top 20 cases account for over half of stressed loans by value), decisions should now be happening at a faster clip.
This brings us to the last, and by no means the least, of the issues — capital. Once the bank has identified the bad loan and determined a fair haircut value for the asset — it needs capital to recognise the haircut on its balance sheet.
Unfortunately, bank recapitalisation has progressed inadequately. The total outlay in the Union Budget for bank recapitalisation is Rs 10,000 crore — perhaps 20 per cent of what the banks really need. Cute acronyms (like Indradhanush) and toothless governance structures (like Bank Boards Bureau) have been tried. If that seems Tughlakian, policymakers are talking about a bigger one — consolidation. The merger of associate banks with SBI is being touted as a precursor. Easy in theory, but has a rather simple tautological fallacy — the banking system simply does not have surplus capital to absorb the aggregate PSB capital gap. It’s a classic case of adding 2 and 2, repeatedly, hoping each time that the answer somehow will be 10! SBI quarterly results showed it up starkly — nearly Rs 3000 crore of standalone profits, but Rs 3000 crore of loss on a consolidated (with the subsidiaries) basis. In short, even a small amalgamation pulled the giant down. Clearly, consolidation is not a likely solution.
Unfortunately, the new ordinance does nothing on capital. The solution has to be about someone writing out a big cheque, which only the government can plausibly do so.
The new Ordinance covers two of the three steps required for a resolution. It’s a big, necessary step forward. But it is not sufficient to resolve the issue — till the government recapitalises PSBs.

Friday, May 26, 2017

Human Shield - yet another necessary evil in India's fight against terrorism

It doesnt take much to generate outrage these days, thanks to both mainstream and social media. However, the kerfuffle over the "human shield" incident has been a topic worthy of debate. Using a civilian as a shield to facilitate tricky counter insurgency operations is neither new nor unusual - either in India or outside - but the images of a civilian tied to the bonnet of the jeep driving through villages is undeniably evokes strong reactions.

Besides the usual battle lines between "liberals" and "right wing", an interesting divergence has been in the military circles, with several ex-servicemen coming out against the modus operandi adopted by Maj Gogoi in this case. They have quoted Geneva Convention, Indian Army ethos, counter insurgency doctrines and more. As Lt Gen H S Panag, ex-Army Commander, summarised,  
"The image of an alleged ‘stone pelter’ tied in front of a vehicle as a ‘human shield’, will forever haunt the Indian Army and the nation"
Honour is essential to a professional army. But the top brass in Indian defence, at both the military and the ministry level, seem to have forgotten that.
But is it really so? Is the human shield the first time a somewhat distasteful tactic has been used in countering insurgency? Or is it but another in a series of such innovations that the Indian security establishment has had to adopt to counter the threat of insurgencies and terror? Lets look at a few examples.


The Mizo insurgency was one of the first such challenges faced by independent India. On Mar 2, 1966, the Mizo National Army (MNA), the primary Mizo insurgency group, overran large parts of Aizawl, the capital of Mizoram, as well as a few smaller towns around it. It included the Treasury, Armoury as well as the Assam Rifles headquarters. After the initial attempts by the Indian Army to relieve the city was beaten back, the Prime Minister Indira Gandhi ordered the Indian Air Force (IAF) to conduct operations. In the first (and till now, only) case, IAF fighters strafed Aizawl with guns and bombs, destroyed large parts of the city, and killed several civilians. But the operation succeeded, MNA melted away into the jungles, and the might of the Indian state was re-established in Aizawl.

In 1967, the Eastern Command of the Army, led by Gen Maneckshaw, launched a programme called "regrouping of villages". It basically meant driving out villagers from villages and grouping them in fewer hamlets (called Progressive and Protected Villages, or PPV). The idea was it would be easier to monitor fewer number of villages and therefore cut off the support to MNA from the populace living in the rural hinterland. some 500 villages were regrouped into 100 odd PPVs - it accounted for 95% of Aizawl's rural population. Did it work? Open question, but the last PPV was dismantled only in 1980, 6 years before the Mizo Accord that ended the insurgency. It was one of a large bouquet of measures required to tackle a well armed insurgent group.


One of the deadliest challenges faced by the Indian state. KPS Gill is widely credited for ending the insurgency, using unconventional means that would not pass muster in "normal" situations. One of them was the "hostage" strategy. A tactic that was a straight lift from the terrorist playbook, it involved picking up (either physically by the police, or through more discrete means) members of the families of known terrorists. Keeping such hostages achieved two purposes. One, it meant that terrorists left the families of policemen (most of whom came from rural Punjab) alone. Two, it worked as a lever for select influential leaders of Khalistan groups to come forward and assist the police in exchange for the security of their families. This was carried out widely in rural Punjab, which is where bulk of the Khalistan leadership emanated from.
The result was a resounding success. This, along with many other measures, helped end the militancy by 1995, barely 11 years after Op Bluestar. In 1985, it was the greatest national security threat faced by India, and no one could imagine that it would be defeated by 1995.

Naxalite movement in West Bengal

There was a time in the late '60/early '70s when the city of Calcutta was literally hostage to the depradations of Naxalites. Policemen were killed in broad daylight, businessmen killed and driven off and the slogan of "China's Chairman is our Chairman" adorned most walls of the city. Biggest issue was the urban middle class sympathy for the movement - some of the brightest young boys from middle/upper middle class families provided leadership to the Naxals. Under an unconventional police chief, Ranjit Gupta, the state (and central) govt turned the tide using what can be mildly termed strong arm tactics. To start with, the police started randomly picking up students from hostels known for their Left wing activism. Many of them were sent to jail and kept without trial for years. Several were simply shot in cold blood. Many families were given a stark choice - to send their boy out of Bengal (preferably out of India), or see him incarcerated or killed soon. Most families exercised the former option. It was a campaign that sent shivers down the cities of Bengal, but it slowly but surely cut the oxygen of fresh recruits to the Naxal movement. By the mid/late '70s, Naxalism had ceased to be a threat to the state.

These are but a few instances. Counter Insurgency (CI) is a complex, dirty business. Hearts and minds is identified as key to CI, but any such campaign can only succeed once the majesty of the state has been established. A neutral populace will tend to side with the group wielding the most coercive power.

Ergo, its perhaps unfair to judge the officer who took the Human Shield call. The Indian Army (and state) have adopted far more distasteful tactics in defence of the state in the past, and succeeded. They were necessary to defend the freedoms and ideas of India for the vast majority of India's citizens.

Sunday, May 21, 2017

Strategic Partnership model for Defence - Modi govt's SEZ moment?

After a long and tortuous journey, the Ministry of Defence (MoD) recently finalised the Strategic Partnership (SP) model for defence manufacturing. The salient points of the new policy are as follows:

1. Four key systems - Single engine fighter aircraft, helicopters, submarines and Main Battle Tank/Armoured Fighting Vehicles - have been opened up for private sector manufacturing. While the first two have been opened up exclusively for private sector manufacturing, the last two are open for PSU/OFB to bid for as well.

2. There will be ONE SP per project selected.

3. The SP will require tie-ups with foreign Original Equipment Manufacturers (OEM), to cover manufacturing, transfer of technology (ToT), assistance in training skilled human resources and other support.

The putative objectives of the policy are clear and have been discussed for years. Create a Military Industrial Complex (MIC) in India, provide competition to an inefficient PSU eco-system, and prmote indigenous solutions to our large defence requirements. The question is, does the policy do so?

Shorn of the hype and hyperbole, not only does the policy not seem to achieve any of the stated objectives, it in fact lends itself to massive rent-seeking opportunities (or at least motivations for the same). At its core, the policy seems geared to simply replace a public sector license-manufacturing monopoly into a private sector license manufacturing monopoly. 

Lets look at the structural elements. 

First, the defence industry, by its very nature, is a monopsony (a market that has only one buyer, and multiple sellers). Typical other examples of monopsony markets are Railway engines, British National Health Service. In such a market, the buyer can maximise value from this market by promoting a high level of competition among many sellers. The issue though is, military technologies, by their very nature, are available with few companies/entities. Ergo, in the best of times, it is difficult to find enough competing sellers to foster genuine competition. Governments around the world therefore try various incentives to foster competition. The new SP policy however, reverses the logic, by creating monopolies in key areas. In short, now the monopsony buyer (the government) creates a monopoly seller to buy from, instead of fostering wide competition to derive maximum value for itself!

Second, the structure envisaged in the new policy is exactly what has prevailed for many decades in India. Typically, the government (and the military) ask a bunch of foreign OEMs to bid for a contract, select one from those who respond (or remain left in the fray after many years of dilly dallying), and then designate a PSU (or OFB) to license produce the product in India. From Mig21s to Su30s, T55s to T90s - this has been the model adopted. The new policy simply replaces the PSU license producer with a selected PRivate Sector SP. The process remains the same - a foreign OEM provides the know-how, a partner Indian SP sets up the manufacturing facilities to license produce the system in India. In other words, convert a public sector monopoly into a private sector monopoly!

Third, the policy supposes that somehow private ownership is the panacea of all ills plaguing the defence industry. Problem is, private sector operates on principles of profit maximisation (as it should). When a policy seems geared to award monopoly status around license manufacturing of a major system owned by a foreign OEM, there is little incentive for the SP to invest in large R&D and achieve true self sufficiency. Long years of license production of Mig21 didnt enable HAL to design a new fighter (or fighter engine) on its own, because it knew when the time comes, it will license manufacture the next generation (which it did, with the Su30). Similarly, a monopoly private company license producing the F16 (say) has no incentive to set up capabilities to design and manufacture the next generation of single engine fighter. It would rather focus on maximising profits for the assembly line by "working the system".

Many years ago, the UPA government unveiled an ambitious SEZ policy, to emulate China's success with SEZ. But thanks to the design of the same, the policy became a tool for tax avoidance and real estate - related land grabbing. Very quickly, the entire process got embroiled in litigations, allegations of corruption and controversies. It was a design defect with the policy itself. The defence SP policy portends to a similar fate

Monday, May 8, 2017

India's defence expenditure - its a problem of quality, not quantity

Do we spend enough on defence? The general narrative in the commentariat forever is a resounding NO. The point received some recent impetus when the Army Chief, General Bipin Rawat said that the military is not getting its due share of national resources. For good measure, the Chief also said that India should take lessons from China in this regard.

Lack of enough spends on defence is an old chestnut - question is, how valid or even accurate is it?

Lets look at the headline number everyone quotes (often inaccurately), military spending as a % of GDP.

Source: World Bank

As can be seen, not only is India well in line with rest of the world in terms of how much of our GDP we spend on defence, we are in fact ahead of China in this regard. Of course, given the disparity in the relative economic sizes, China spends a lot more on absolute terms, but the solution to that is to expand our own resource base (GDP) to afford a greater spend. However, do we spend too little? Data doesnt suggest that at all, in fact its quite to the contrary.

However, its not just about GDP, but also budget expenditure-intensity of defence. Finally, defence can be funded only out of the public exchequer. And there are competing demands for the limited tax-kitty that funds defence too. And it is here that India is an absolute outlier, on the negative kind.

Chinese budget numbers are not available, but India spends clearly a very high proportion of its Central Budget on defence. Comparable to the US, and only marginally short of Pakistan, where the military is in charge of government and tends to have outsized share of resources and influence.

Put the two together - proportion of GDP and proportion of central govt expenditure, and the oft-repeated lament of low spend on military doesnt stand up to scrutiny. So, what really is the issue?

In simple terms, its quality not quantity. We spend enough, but we underspend on quality. It has 2 facets.

One, we spend too much on salaries and pension. In the last 4-5 years, 45-50% of the defence budget has been spent on personnel costs. As a comparative benchmark, US spends around 25-30% of its defence budget on personnel costs. Bad news doesnt end there though. Thanks to OROP and a steady increase in the number of personnel (Indian Army has expanded around 25% in the last 15 years, a period when almost all major militaries have downsized on personnel), the pressure of salaries/pension is only going to increase.

Two, India is unique in terms of its import-intensity of expenditure on military. For years, we have been amongst the top 3/4 weapons importers in the world. Of late, we have acquired the dubious distinction of being the numero uno!

Source: SIPRI

Countries which spend more than India on defence (as proportion of GDP) - Russia, US, Israel - typically are large net exporters. The military industrial complex is a large part of their domestic economies/employment. For India, conversely, large chunks of the defence budget go to financing imports, with no network externalities in the domestic economy. Its a double whammy, where we spend a pretty large sum of money, while not creating long term benefits for the economy. There is adverse military impact too, as imported weapons are often not available when they are most needed (ammunition for Bofors gun during Kargil as a case in point).

In nutshell, Gen Rawat (and the commentariat) is completely wrong. India doesnt lag in spending on defence - we spend as much as we can afford (and some more). The issue is on quality. Unless we improve upon that, we will continue to derive sub-optimal outcomes for the considerable sums that we are spending on securing India. 

Friday, April 21, 2017

SEATO – an idea whose time has (finally) come

Of the many alliances spawned by the Cold War, few died as unmourned as SEATO (South East Asia Treaty Organisation). Marketed as a South-east Asian version of NATO, an anti-Soviet/Communist security alliance, it bore few of the imprimatur of its European inspiration. To start with, it had too many members that were very far (geographically, as well as in terms of political mindspace) from South East Asia. Most importantly, while it was a military alliance in essence, it lacked NATO’s “boots on the ground” – member countries didn’t contribute to and create standing forces of soldiers, ships and aircraft.

As a result, when SEATO formally disbanded in 1977, few tears were shed. Its time to consider a rebirth though. A newly imagined SEATO would serve two mutually re-inforcing imperatives facing Asia today. One, as an alliance against an increasingly assertive and confrontational China, a country with boundary (or maritime) disputes with almost all of its neighbours. 
Two, as a hedge for the increasingly isolationist United States, whose military umbrella (and nuclear too, for many Asian countries) has enabled the region profit from globalisation in relative peace.

The imperative for an alliance is clear – Chinese belligerence radiating out of its periphery across the length and breadth of Asia. The Dash9 issue, seizing Singaporean APCs in Hong Kong, open bullying of Mongolia (and the more recent diplomatic kerfuffle with India) on the Dalai Lama issue, simmering disputes with Vietnam, exacerbating old disputes with India – Chinese hawkishness has assumed a dramatically higher level of edge in the last 5/6 years. The existing security architecture, both diplomatic (APEC/ASEAN/Indo-China Boundary Commission) as well as military (essentially US military presence in Asia) have proven to be insufficient in tempering the noise. With the “America first” approach of President Trump, the sufficiency of the existing architecture comes under even greater scrutiny.

A resurrected SEATO becomes an interesting policy response in the current scenario. The toughest part of a new SEATO would be the balance between the structural and the political. A formal military alliance will invariably meet with violent diplomatic reaction from China. An informal multilateral exercise effort (like Red Flag, Malabar etc) reflects a transient, ephemeral optics without any real deterrence value. There is also the issue of different, sometimes zero-sum political disputes between various Asian states (Singapore and Malaysia for example) that would bedevil a security alliance with strong military commitments.

To start off with meaningful chance of success, the new SEATO should be formulated around 2 core principles. One, it needs to be led by Asian member countries. US participation could be a glue (and a source of technical and military support), but the organisation cannot be led by the US. This would immunise new SEATO from Sino-US tensions and disputes, substantially. Two, the core of new SEATO should be around existing, well-discovered security dialogues. Membership can radiate out from a consistent core.

Keeping the above in mind, new SEATO would be best constructed around an Indo-Japanese core, with invitation open to all Asian countries willing to join. Why India and Japan? First, economically and strategically, these are two biggest Asian powers, after China, with the military and economic capacity to building a “boots on the ground” security architecture. Second, India and Japan share an enormous convergence on key strategic issues facing the region, and very few dissonances. Third, complimentary military capabilities (eg, Japanese Navy has top class ASW, while Indian Navy brings heavy Surface/Land attack firepower). A SEATO led by Asia’s second and third largest economies (and militaries) would provide the centripetal impetus for other Asian countries to join up. In the first phase, Vietnam, Singapore and Indonesia would be the first obvious candidates for membership.

The good news is there are existing infrastructure available to kickstart formation of a standing security force for the new SEATO, in the form of India’s Andaman and Nicobar Command (ANC). Based out of the Andaman and Nicobar islands, straddling the chokepoint of straits of Malacca in the Indian Ocean, ANC is like an “unsinkable aircraft carrier”. Today, it is India’s only operational joint services command, with one infantry brigade, some small naval ships and a squadron of IAF transport choppers. In recent years though, there’s been significant upgrades to the infrastructure in ANC. The base today can house and operate destroyer-sized ships and Su30/P8I class aircraft. Adding in 2-3 frigates and LSTs each from both Indian Navy and JMSDF, a squadron of fighters on rotation and a mixed squadron of P8I and P3C maritime patrol aircraft– it would represent a very formidable strike force. The joint strike force would draw upon the experiences of Malabar and Sahyog-Kaijin maritime exercises to enhance interoperability. Other potential member states like Indonesia and Vietnam operate Russian platforms (Su30 aircraft, Kilo-class submarines, Petya-class frigates) maintained by India and whose crews are trained by the Indian military.

Formation of such a strong permanent standing force at the heart of the Straits of Malacca will send a powerful message to China, as well as to the broader region. It will be about Asia taking charge of its own security by putting boots on the ground, and refusing to be picked off in individual disputes with China.
Its not very often that history comes full circle, so soon. But the idea of a new SEATO is one whose time has re-arrived!

Thursday, March 23, 2017

India's nuclear posture - the change is in (expert) minds!

In the last few weeks, the niche (but rapidly growing, and influential) community of strategic affairs experts have been agog and abuzz with a new postulate – a putative change in India’s NFU doctrine governing use of nuclear weapons. A few months back, then-Defence Minister Manohar Parrikar created some flutters by “thinking aloud”, in a public function, the merits of NFU. But the latest round of speculations have largely owed their origins to ex-NSA Shiv Shankar Menon’s book, Choices.

Three widely-read commentators – VipinNarang, Shashank Joshi and Ajai Shukla – wrote interpretive pieces on a couple of paragraphs in Menon’s book. The key message was essentially the following:
  1. India’s NFU has suspect credibility with the Pakistanis, especially w.r.t a response to a Pakistani tactical nuclear strike on Indian formations within Pak.
  2. Menon is alluding to carving out a “first strike” option outside of NFU for India, which would mean India could go for pre-emptive Counter Force posture (seeking to destroy Pakistani nukes), rather than Counter Value (destroying Pakistani cities/population centres) posture latent in NFU today.
  3. In simple words, what it means is that India would look to strike first, and look to seek and destroy Pakistani nuclear weapons. This is obviously a 180 degree turn in India’s current posture, which is NFU (No First Use), and strike second in response to an attack, and hit the enemy’s population centres.

Nuclear postulates by definition are dense, prone to heavy interpretation of sentences (even words!), and generally light on real data/information. It is one area where the number of people who are “in-the-know” is small, and “those who know don’t talk, those who talk don’t know”. Hence, drawing conclusions is more hazardous than in the field of economics (which for good reason, is always compared unfavourably with astrology)!
In this case though, it would seem that the authors have collectively ended up over-interpreting a few sentences (Group Think perhaps?).

Leaving aside Menon’s book for a moment, lets look at (relatively) confirmed information on hand.

One, India continues to consider nuclear weapons as weapons of deterrence, and not of warfighting. What it means is that India does NOT expect to use these weapons ever, and possesses them merely to deter other countries from using them against us. This is the reason why India hasn’t embarked upon a tactical nuclear bomb programme, despite having the means to do so (2 out of the 5 tests in Pokhran II were tactical warheads). Importantly, when ManoharParrikar “though aloud”, the Ministry of Defence (MoD) came out with a clarification within hours contradicting its own minister. This isn’t something that is usual in India, and the Establishment wouldn’t have reacted with such decisive alacrity if there was something more serious about Parrikar’s kite flying.

Two, a first strike, Counter Force doctrine involves crucial changes on the weapon profiles. To start with, it requires a vastly greater number of warheads (as the country using nukes first would necessarily have to be prepared for a third strike, in retaliation of the adversary’s invariable second strike). The glacial pace of India’s nuke accretion indicates nothing of this sort. Further, a CF posture would almost necessarily require MIRV warheads, to increase the possibility of success of the “first strike”. India’s MIRV programme has progressed at an extremely slow pace. On the contrary, the focus of the strategic programme has been overwhelmingly on survivability of missiles (hence road-mobile, caniserised Agni) and of the launch platforms (hence the Arihant fleet of nuke submarines). Both of these are a lot more expensive and time-consuming than either producing more warheads or MIRV, and actually fit nicely with the current stated NFU posture.
Three, Pakistani geography makes hoary distinctions between CF and CV rather moot. A decapitating first strike against (say), Kahuta, is likely to cause large-scale damage to Rawalpindi. Sans a 100% take-out of Paki weapons (an outcome that even US forces cannot guarantee), a proportionate retaliation by Pakistan will invariably be on major Indian cities. India’s primary objective (unlike Pakistan’s) is precisely to avoid such outcomes altogether. Hence, there is little incentive for India to carry out such an attack.

Finally, coming back to Menon and his book. While interpretation is the mother of discovery in nuclear affairs, in this very candid interview, the author himself seems to only reiterate the validity of India’s current stance.
So it’s important that we keep reviewing [NFU] but so far I think it’s actually served our purpose.
Retaliation for us – we’ve laid down quite clearly the conditions under which we would use them. And I think we’ve made that quite clear in the doctrine. We are, in fact, one of the first countries to be so clear and one of the quickest off the mark in terms of declaring a doctrine.  And we have so far matched that in terms of our posture, in terms of what we do.
I think it’s quite clear that no matter what the scale, any nuclear attack will be met with retaliation, and the retaliation will be big.

In a nutshell, more of the same! Net net, it made for interesting reading, but it would seem that India’s nuke posture would keep giving everyone only a sense of déjà vu. Not great for analysts, but good for all of us hoi polloi!

Thursday, February 23, 2017

The very BAD idea of a Bad Bank

The idea of a "Bad Bank" as a solution to India's large bank NPA problem isnt new. Its been around for many years, discussed, implemented in parts (through different experiments of Asset Reconstruction Companies, ARCs). But recently, the idea received some high level policy support, when the CEA Arvind Subramanium wrote an entire section of the Economic Survey on the idea, essentially saying "its an idea whose time has come". Now, while Victor Hugo might disagree from his grave, but this is one idea against which all powers must be used, even if its time has come. Simply because its a really bad idea - structurally, conceptually and implementation-wise. How? Read on...

What are the basic parameters of resolving a bad loan (NPA) issue? As practising bankers (as opposed to many Central Bankers, and most/all journalists/academics) would instinctively know, it consists of 4 basic rules:

One, estimating and affecting a haircut on the loan amount, in order to make the underlying operating business viable, and able to service the loan.
Two, a turnaround plan for the business that extracts maximum value for the bank - both on loan recovery as well as potentially on the equity that replaced the loan haircut taken. This includes changing promoters, structuring, legal etc.
Three, immediate capital to enable the bank absorb the haircut.
Four, specialist bankers with the skillsets to carry out #1 and 2.

Why has India's NPA issue been so intractable? Very simple - there are structural impediments to #1 and #4 above.
One, thanks to the scourge of the 3 Cs (CBI, CAG, CVC), public sector bankers (PSB) have been loathe to structuring haircuts for any of the loans gone bad, or under stress. They have found it a lot easier to simply evergreen the liability - in simple language, leave the problem for their successors to resolve. As a result, a stressed loan of (say) INR 100, after unpaid interest, interest on interest, fines on delay on interest payment, balloons to double or even more by the time someone starts taking action. The storied Kingfisher Airline is a case in point - of both bankers evergreening the loan for years, as well as refusing a sensible haircut-backed settlement. 

Secondly, bank recapitalisation has progressed in wholly inadequate quantums. Nifty acronyms (like INDRADHANUSH) has been hilariously tried in lieu of adequate capital being injected. Thanks to depressed valuation levels (as well as lack of investor appetite), it has been impractical for banks to tap capital markets for equity capital.

How does a Bad Bank (BB) resolve any of the above two issues? It doesnt. A govt-owned BB would simply be a case of "left pocket right pocket", both in terms of capital as well as in terms of enabling operating environment (3 C's). A private sector BB would have moral hazard questions (for example, at what value would be buy the NPAs from the existing banks?) that would compound the 3 C's related issues for PSBs.

We have no dearth of #4, ie, bankers who know the industry domain and can come up with solutions. Over the years, the legal-regulatory architecture for #2 - creating new lending structures, knocking off promoters, bringing in specialist managers - have also become a lot more conducive.

And there lies the nub of the real solution. As Mark Antony remarked, "the fault, dear Brutus,is not in our stars, but within ourselves". The issue is within the government - a 3rd party structure isnt going to help. A large dose of capital (good news - demonetisation has injected part of it into balance sheets), financed through any of the many clever ideas long debated (RBI reserves, SPV, Bank HoldCo listing etc) will be a first step. Taking PSBs off the category of "public servants", and hence taking them away from the ambit of the 3 C's, will complete the enabling circle. This will free up banker energies towards searching for pragmatic, real solutions, ring fence them from much-abused and uninformed criminal investigations and incentivise true problem-solving.

Talk is cheap, acronyms cheaper, and bad ideas have negative value. The government should concentrate on walking the real talk now - there's been enough of talk/acronyms/bad ideas!