New Delhi, Feb 26 (KNN) The Economic Survey, placed in the Parliament on Friday, cautions that the burgeoning NPAs of Public Sector Banks (PSB)s is one of the most critical short term challenges confronting the Indian economy.

The survey mentions the twin balance sheet problems – the impaired financial positions of the Public Sector Banks (PSBs) and those of some corporate houses.

It also says that the twin balance sheet challenge is the major impediment to private investment and a full-fledged economic recovery.

The Survey mentions 4 R’s - Recognition, Recapitalization, Resolution, and Reform towards resolving this challenge.

Recognition -Banks must value their assets as far as possible close to true value as the RBI has been emphasizing;

Re-capitalisation - Safeguarding the capital position via infusions of equity;

Resolution - The underlying stressed assets in the corporate sector must be sold or rehabilitated; and

Reform - future incentives for the Private Sector and corporates must be set-right to avoid a repetition of the problem.

Finance Minister Arun Jaitley recently said that recapitalisation to the tune of Rs 2.4 lakh crore in public sector banks is a ‘high priority’ item for the government.

According to RBI statistics, public sector banks had categorised 6.2 per cent of their total loans as NPAs as of September-end. Another 7.9 per cent loans were restructured, while 2.9 per cent were written off. In all, 17 per cent of state-run banks' portfolios were either written off or dodgy.

There are a number of asset restructuring companies (ARCs) in the country, including Arcil and Edelweis ARC, and they are doing good business.

However, they may not be able to handle the surge in bad and dodgy loans, and a state-run asset management firm will be needed to deal with the crisis.

According to the internal estimates of North Block, the total amount of dodgy or stressed loans could be as high as 8 lakh crore.

However, the move to set up a new government-promoted asset management company is facing opposition from the Reserve Bank as well as critics within the banking sector.

They maintain that there is a moral hazard involved in a government-promoted "bad bank" taking over assets and handing them over to new promoters as it could lead to cases of either crony capitalism or handing the assets back to old promoters under a new cover. (KNN/DB)