Significance of Public Sector Asset Rehabilitation Agency (PARA)

For the past few years, the central bank i.e. the Reserve Bank of India has been trying to deal with the bad loans problems in the best way possible. At first, it allowed the lenders to restructure their loans. When it didn’t work, it initiated asset quality reviews to get to the root cause of the problem but unfortunately, this didn’t work either.

The two initiatives were just two of the many that RBI tried its luck with. However, despite the numerous efforts, the non-performing assets (NPAs) have been only rising continually and today make for about 9% of the total loans of all banks combined.

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In the Economic Survey 2016-2017, the concept of Public Sector Asset Rehabilitation Agency (PARA) was introduced for the first time as an ideal solution for the growing problem of bad loans.

What is PARA?

PARA will be an independent agency that will identify the biggest NPA accounts of several banks and buy them out. The following are some of the points on why it could potentially solve the problem easily:

• The entire PARA agency will be focused on resolving the bad loans problems. With only one thing to focus on, it will be able to deliver better results than the actual lenders which have a variety of other operations to tend to as well.
• Since PARA will be akin to a large lender in comparison to the other individual banks, it will have a better bargaining ability and will be able to take a more stringent action against the defaulters.
• PARA will issue government securities to raise capital for buying the NPAs. It will also get a capital infusion from the RBI directly. Thus, raising funds won’t be a major problem.

We have seen that Private Asset Reconstruction Companies(ARCs) have been unable to deal with the bad asset problem so far. Moreover, history has proven (if we look at the financial systems in other nations) that a central agency that’s dedicated to resolving bad loans problems is much more capable of handling such problems.

So, naturally, PARA has a huge potential. Under the right guidance and execution, it has the capacity to greatly control the problem that’s haunting the banking industry for decades.