Indian banks are in deep trouble.

Their pile of bad loans, or stressed assets, is close to Rs10 lakh crore ($154 billion) now, which is more than the GDP of at least 137 countries. And what’s more, it is only growing.

Stressed assets, which include non-performing assets (NPAs) and restructured loans, form some 12% of the total loans in Indian banking now.

NPAs are loans that borrowers have stopped repaying—either the principal or the interest—with slim chances of recovery. Gross NPAs among Indian banks have shot up by 135% between December 2014 (Rs2.61 lakh crore) and December 2016 (Rs6.97 lakh crore). In March 2017, the average bad loans of public-sector banks (PSBs), which account for 70% of India’s banking system, stood at 75% of their net worth. Restructured loans are those for which the banks have relaxed the terms and conditions in the hope of recovery. But then, the probability of default still remains high.

By now, the condition is so bad that for every Rs100 that they lend, Indian banks are likely to get back only Rs88.

The genesis

Trouble began in 2008 following the collapse of Lehman Brothers and the resultant global slump. Till then the Indian economy had been cruising along on a wave of optimism. Between 2006 and then, it had grown at around 9-9.5%. So, companies borrowed aggressively for expansion. When the slowdown came in 2008, it played havoc with corporate repayment abilities. Banks have turned cautious since, and by February 2017, loan growth had hit an all-time low of 3.3%.

The corporates in India account for a major portion of bad loans. The top-10 business group borrowers alone have to repay Rs5 lakh crore to banks. Some of the businessmen—Vijay Mallya, for instance—have failed to cough up the money even though they have the ability to pay, resulting in the banks declaring them wilful defaulters.

The RBI, as well as the supreme court of India, had to eventually step in to tackle the issue.

Yet, despite the steps taken by the banking regulator under its former governor, Raghuram Rajan, and his successor and current chief, Urjit Patel, nothing much has come about it.

RBI’s measures

In February 2014, the central bank introduced the joint lenders forum (JLF) which allowed multiple banks that had extended loans to a specific company to consider a collective mechanism to resolve the problem. However, the lenders seldom agreed with each other and recoveries remained dismal.

Then the RBI introduced the strategic debt restructuring (SDR) scheme in June 2015, a new version of the failed corporate debt restructuring (CDR) scheme of August 2001. This allowed banks to buy a stake in defaulting companies by converting debt into equity. However, once again, it met with little success as banks were still dependent on promoters for the resolution. Besides, finding buyers for this equity was often difficult.

A year later, in June 2016, the banking regulator introduced a scheme for sustainable structuring of stressed assets. This let banks restructure large loans where the projects were up and running. Evidently, the scope of this scheme is limited as it is applicable only to active projects.

One reason for the RBI’s measures not bearing fruit, bankers say, is the slump at the ground level that was not reflected in India’s big GDP numbers. “Bad loans are a culmination of the economy’s slowing down, stalled projects, and licences of players from some industries (iron & steel, mining, telecom) being called off,” explained N S Venkatesh, executive director at Lakshmi Vilas Bank, a private lender.

Most recently, on June 14, the central bank directed that the top 12 large borrowers, which account for 25% of the bad loans in the country, be immediately taken to bankruptcy courts. “This new move is likely to speed up things. It spells that we don’t need to coerce and coax the promoter to co-operate with us. Now, the creditors are in control and this move of showing the stick to the promoters is what was required,” a CFO of a Mumbai-based private bank explained, requesting anonymity.

Experts say that the other mechanisms failed because the central bank does not have any significant influence on promoters and shareholders of defaulting firms. “The RBI does not regulate promoters and other equity stakeholders…as a result, they cannot force resolutions on to them,” Nikhil Shah, managing director at Alvarez and Marsal, a consultancy specialising in turnarounds, told Bloomberg in March.

However, banks themselves are unable to form a consensus on a resolution process, prolonging the bad loan crisis, said Karthik Srinivasan, an analyst at credit rating firm Icra. “But with the RBI directing banks to take 12 accounts directly to the bankruptcy court, the power has now shifted from the squabbling banks to the regulator and this will hasten the process,” Srinivasan said.

Others remain cautious, though.

“The steps taken by RBI, including the recent insolvency mechanism, are in the right direction. But these are not magic wands; it is going to take some time before the crisis can be resolved,” Venkatesh said.

The solutions

The process of recovery in India is usually extremely long, sometimes taking up to 15 years. On average, India takes over four years to declare a promoter or a company insolvent, which is more than twice the time taken in China and in the US, according to the World Bank. So, Indian banks recover only 25 cents to a dollar in India, compared to 36 cents in China and 80 cents in the US.

While, the new bankruptcy law passed in May 2016 aims to shorten this time period, the framework to implement it still isn’t in place.

To solve these sticky issues, policy makers and experts have been discussing possible solutions.

One among them is the creation of a government-controlled bad bank—an entity that will hold NPAs and stressed assets of firms suggested by credit ratings firms and even private equity majors like KKR. “A bad bank might provide a way around some of the problems that have led Indian banks to favour refinancing over resolving stressed loans. For example, large corporates often have debt spread across a number of banks, making resolution difficult to coordinate. The process would be simplified if the debt of a single entity were transferred to one bad bank,” credit ratings firm Fitch said in a Feb. 24 note.

This has had its share of critics, though.

Meanwhile, re-capitalisation of state-owned lenders is important, too, considering their overwhelming domination of the industry. Equity infusion will push up assets, in the process bringing their bad loans-to-net worth proportion down from 75%. But the capital infusion requirement of government-owned banks is massive. The top PSBs in the country alone will need some Rs95,000 crore to maintain healthy financials, credit ratings firm Moody’s says.

The government’s plans are much smaller, though. In February, it announced Rs10,000 crore for this purpose under the Indradhanush plan in the next financial year.

Clearly, a way out of the woods is still out of sight.