With Raghuram Rajan gone, idea of ‘bad bank’ is back on policy table

Rajan had opposed the idea suggesting that it would make sense for the banks themselves to recover the dues.

Written by Pranav Mukul , Anil Sasi | New Delhi | Updated: October 4, 2016 3:57 pm
raghuram rajan, India RBI, indian banks, bad loan, NPA, Raghuram Rajan, banking sector, Indian economy, Urjit Patel, bad loans issue, economy news, banking news, business news, india news Former RBI governor Raghuram Rajan (File Photo)

THE CHANGE of guard at the helm of India’s central bank could prompt a rekindling of a proposal for setting up a “bad bank” to absorb toxic assets from loss-laden state-owned lenders, a senior government official told The Indian Express.

This comes amid growing realisation in policy circles that the measures taken till now to tackle the burgeoning loan problem in the country’s banking sector, which is seen as hampering the financial sector’s ability to fund productive sections of the economy, are still short of yielding tangible results.

WATCH VIDEO: Reserve Bank Of India Cuts Repo Rate By 25 bps To 6.25%

Former Reserve Bank of India (RBI) governor Raghuram Rajan, who made way for Urjit Patel on September 6, was fundamentally opposed to the idea of a “bad bank”, which is envisaged as an entity that would buy non-performing assets from other banks to free up their books for fresh lending and then suitably dispose of the toxic assets.

“Some movement (on the bad loans issue) could happen in the next two to three months… now that there’s a new RBI Governor, it raises the possibility. The previous RBI governor was not keen on clean-ups through a bad bank and Asset Restructuring Company.

It is also necessary for the finance ministry to be on board with the idea,” said the official, who plays a key role in top-level policy formulation in the government.

Rajan had opposed the idea suggesting that it would make sense for the banks themselves to recover the dues. He had maintained that in cases where loans are not priced appropriately when transferred to a “bad bank”, it could create issues. Rajan was also firmly of the view that the concept of a good bank and bad bank may not be relevant for India since much of the assets backing the banks’ loans are viable or can be made viable.

But the official, who did not wish to be named, reaffirmed that there is increasing realisation within sections of the government that the recapitalisation of public sector banks as a solution for tiding over bad-loan losses could only go so far, “purely because of the country’s finances being limited”.

“In the end, the problem doesn’t get sorted out. You might recapitalise the banks, but assets are not getting cleaned up. What you do through recapitalisation is probably give some more life to projects, while at the same time allowing banks to lend more credit, but that still doesn’t get rid of the toxicity in the assets,” said the official.

He said that there are countries that have tried to do it (set up a bad bank) in the past, and that “nobody has failed”. “The complaint has generally been that it wasn’t done fast enough,” he said. The RBI did not respond to an email sent by The Indian Express seeking comment.

A “bad bank” was initially proposed to resolve the loans issue, and it would take over assets from public sector lenders, thereby forcing them to focus on their normal commercial activities. The concept was pioneered at the Pittsburgh-headquartered Mellon Bank in 1988 in response to problems in the bank’s commercial real-estate portfolio. According to McKinsey & Co, the concept of a “bad bank” was applied in previous banking crises in Sweden, France, and Germany.

In India, a revival of the proposal comes at a time when the gross bad loans as a percentage of total loans of Indian banks have nearly doubled to 8.7 per cent as of June, from 4.6 per cent in March last year, according to RBI data. If rolled-over or restructured loans were to be also considered, 12 per cent of all bank loans were stressed as of end-June.

Measures tried out by policy makers have failed to adequately stem the rot in India’s banking sector. In 2014, the RBI had come up with a scheme that permitted banks to extend the maturity of loans given to companies in the infrastructure sector. In 2015, it extended banks the option of converting a part of the debt into equity and taking a controlling stake in overleveraged companies. In June this year, the central bank floated yet another instrument called the Scheme for Sustainable Structuring of Stressed Assets (S4A plan), which allowed lenders to split the outstanding debt of a stressed company into sustainable debt and equity with some riders.

Besides, the Bankruptcy Code is not expected to yield results in the next couple of years. Also, the fear of action by enforcement agencies is seen as preventing bankers from getting into a negotiated settlement or sign off on “haircuts” in case of companies where the loans have gone bad.

For all the latest India News, download Indian Express App now

  1. A
    Ajit
    Oct 3, 2016 at 2:59 am
    If bjp is bania ,how about congress that let this happen ?.sahara ,mallya , all bad loans have happened in congress era ,the scamster party ,.what of dalit party ,bsp in up ,most of its ex members under probe for huge loot.what of trinamool of sharda scamsters,of dmk top br behind bars for telecom fraud. What of samajwadi party arguably the most criminal party.lt;br/gt;It was indira hi who nationalised banks let in an era of mammoth looses ,privatise them at earliestlt;br/gt;Hats off to modi for trying to clean india in all its sense
    Reply
    1. A
      Anil Bharali
      Oct 3, 2016 at 1:50 am
      BJP is a Bania party , it is natural tendency of Bania to loot government exchequer in connivance with dirty people in politics.we are waiting to see whether PM Modi is gradually exposing his real Bania loving image and culture soon !!
      Reply
      1. A
        Anil Bharali
        Oct 3, 2016 at 1:50 am
        BJP is a Bania party , it is natural tendency of Bania to loot government exchequer in connivance with dirty people in politics.we are waiting to see whether PM Modi is gradually exposing his real Bania loving image and culture soon !!
        Reply
        1. C
          Col S
          Oct 3, 2016 at 2:25 am
          Why must NETA lose hold of PSU Banks.?This is the EASIESTmode for MAKI G BILLIONS.lt;br/gt;Mega loan to FAVOURED, violating regulations and then write off , PROMISING Budgetary support from TAX PAYERS money. Banks HAPPY Abiding and NON_ACCOUNTABLE.
          Reply
          1. A
            Alibhai
            Oct 3, 2016 at 12:40 pm
            Bad bank idea is not bad as it removes the diseased portion from the financial insution. However there nothing to stop the insution from repeating the mistake.
            Reply
            1. D
              Danendra Jain
              Oct 3, 2016 at 12:18 am
              Idea of formation of Bad Bank to deal with burden of bad debts in bad banks is undoubtedly a bad idea of bad politicians and bad officials who want to conceal their bad works. This will to be disastrous because bad officials of these banks will fell free to shift all bad debts to bad banks and again create bad debts by sanctioning loan to bad borrowers. In this way though they will be able to present a shining and rosy picture of the bank and cheat bank depositors, investors and other stakeholders. In the long run Bad banks will collapse just as DICGC collapsed a decade ago and the way CGTSME will collapse in few years.
              Reply
              1. S
                Saurabh Singh
                Oct 4, 2016 at 4:44 am
                incompetent as well as corrupt officials will be set free. Bad Bank concept will also incentivize reckless lending in future. I think more than defaulters it is banks which are responsible for creation of Large NPA's, but look at the arrogance of these bankers.
                Reply
                1. R
                  Raja
                  Oct 3, 2016 at 8:56 am
                  This is nothing but shifting rotten eggs from several baskets to a big single basket.
                  Reply
                  1. K
                    K.V.Mahadevan
                    Oct 3, 2016 at 3:05 am
                    The bane of the success or failure is our beuracratic control over banking. It shd be left to the bank to decide when to sell their ets and at what price. All these years banks were expected to wait for years on end to put the ailing ets on with one beaurocrat after another trying to tell them what to do and when. When the borrowers know that they have to lose their physical ets at the earliest, they will improve their efficiency better. Let the banks be free to grant and callback loans as is stated in the loan agreements signed by them and their clients. The judicial system shd also recognise the legitimacy business needs of banks and the beurocracy , I mean the investigating agencies learn to respect the business process where and how and why the credit decisions are made. lt;br/gt;India shd come out of the police Raj when it comes to public sector but shd be able to ensure evidence based prosecution of connivance wrongdoings etc., For which specialised courts under the aegis of the RBI and a self regulatory comity of the banks like irda, trai etc., Cud be set up.
                    Reply
                    1. M
                      Manzoor
                      Oct 3, 2016 at 6:06 am
                      Hats of to "my foot", why we tax-payers will be spent for criminal industrialist. Now bank will be relieved from their sin and they will again start the same corny pactice. Now slowly we will know why RR's tenure has not be extened.
                      Reply
                      1. S
                        S Subramaniam
                        Oct 3, 2016 at 1:08 am
                        It is utterly bad idea to create a bad bank. If it materialises the days are not far nobody would be accountable for bad debts. The so called bad bank will shirk their responsibility on the pretext that xyz have paid the loans ant they are only monitoring till its liquidation or write-off. The rechristened good banks will go scot-free and indulge in more bad debts which in the course time will be transferred to the newly formed bad banks. Government should rethink about the new proposal.
                        Reply
                        1. M
                          Mohandas
                          Oct 3, 2016 at 5:08 am
                          Bad Bank for bad but dear ones ; who can take as much as possible and the BD will repay or erase it at the cost of the taxpayer; and then, similarly there could be BAD TAX Office too , at the cost of sincere tax payers. Could be extended to other realms too!!
                          Reply
                          1. P
                            PRATEEP SENGUPTA
                            Oct 3, 2016 at 3:57 am
                            Instead of being guided by the half-baked news on net, please verify who are the main bank loan defaulters. It is not ordinary people like you and me but the big industrial houses. Now our present govt is trying to p the burden of those loans worth billions on the nationalised banks; it means the burden will be indirectly on us. How do you think that Modi is trying to clean India when he is in the process of waiving those loans? Speak with facts not with political emotions.
                            Reply
                            1. M
                              M.Shiva Kumar
                              Oct 3, 2016 at 10:40 am
                              Dr. Rajan was like an oncologist who could not only diagonize cancer (bad loans) in the system but was able to formulate a chemo-therapy (like NPA disclosure under new norms) to get rid of cancer. No doubt, the chemo therapy is a risky,painful and torturous treatment but bound to imrove our "banking health" in long term. However, our political leaders seem to be under the belief that cancer can be isolated with in the system (bad banks) from good cells and an oncologist is not required for this treatment.
                              Reply
                              1. T
                                Thomas George
                                Oct 3, 2016 at 4:08 am
                                A Bad Bank is a bad idea - primarily because it does not solve issues of bad loans. It merely enables Banks which had enjo care-free lending to wash their hands off their 'crimes'. Also, will create much scope for political parties to fill their respective coffers from loan defaulters through urances of soft-peng. And it will be naive to expect a Bad Bank to be sincere in recovering bad loans ; later we can think of Worse Banks.
                                Reply
                                1. Load More Comments