The failed attempt by bankers to sell Kingfisher House last month, in an attempt to recover money they have lent to defaulting companies managed by Vijay Mallya, naturally made the headlines. But it is only part of what seems to be a larger story of failed asset sales.

The problem at first glance is one of valuation. Bankers are not prepared to bring down the prices of such assets that have been offered as collateral against loans. The deeper problem is one of fear. Bankers will have to accept haircuts if they have to sell assets right now, but they are wary of accepting lower prices because of fears that they will later be investigated for corruption. Think of this as a variant of the problem faced by the second United Progressive Alliance (UPA) government, when bureaucrats refused to take decisions to avoid getting sucked into the corruption scandals of the time.

It is in this context that the warnings over the past few weeks from Reserve Bank of India (RBI) governor Raghuram Rajan, finance minister Arun Jaitley and Vinod Rai of the recently constituted Banks Board Bureau matter. Not all defaulters are wilful defaulters who deserve to be treated harshly.

Given the stress in the banking sector and rise in non-performing assets (NPAs), some public outrage is understandable, as tax payers will have to fund the recapitalization of public sector banks. But it is important that every loan default is not seen as a scam and that every realistic decision by bankers to resolve the problem in their loan books does not invite the attention of investigative agencies. A witch-hunt is the last thing we need.

What is even more worrisome is that the fear is not limited to NPAs but is said to be affecting the regular lending business of banks. Judgmental errors in business are not unusual—as they are not in the world of banking. However, in the current environment, some bankers are not willing to take decisions because of the fear that they could be subjected to enquiry if the loan goes bad at a later date.

This can affect the flow of credit even to sound and good businesses, which, in turn, can affect overall economic activity. We have seen this happen when the bureaucrats played it safe during UPA-II; economic growth was affected at the time. Therefore, it is important that adequate safeguards are built so that bankers are able to take decisions without fear and do what is right for banks and the banking system.

Similarly on defaults, it is possible that some entrepreneurs are unable to pay back simply because the business has suffered due to wider macroeconomic conditions, or there have been delays in regulatory approvals—all beyond their control. Even if some entrepreneurs borrowed on the basis of flawed assumptions and business decisions have gone wrong, there are ways to deal with such situations and every defaulter should not be seen with suspicion. Every default is not a consequence of diversion of funds or corporate fraud.

In this regard, RBI has done the right thing by opposing the idea of making the defaulters’ list public as it will not solve the problem. On the contrary, it will only complicate the situation. Rajan recently explained that if an act of default is put out for public consumption without understanding the severity or reasons, “It may result in a loss of business as well as undue anxiety and panic and therefore chill business activity".

RBI has taken several steps to empower banks so that they can deal with NPAs more effectively, but putting the names in public will negatively affect the business environment.

What is the right way to solve the problem of NPAs in the banking sector? Tell us at views@livemint.com

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