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Lockdown, slowdown: NPAs looming, PSBs put bad bank creation plan back on table

While bankers are pushing for this, and there is support for the proposal within a section of the government, the broader view in the Finance Ministry is that PSBs are “well-capitalised” and private asset reconstruction companies already exist in the banking system.

By: ENS Economic Bureau | Mumbai, New Delhi |
Updated: May 12, 2020 8:26:28 am
non-performing assets, NPAs of banks, banks bad loans, corna pandemic, economic slowdown, RBI, coronavirus, coronavirus news, covid 19 tracker, Indian express Panel proposed creating asset management company two years ago. (File Photo)

With non-performing assets (NPAs) of banks set to witness a spike in the wake of the lockdown triggered by the pandemic and the economic slowdown, the banking sector is preparing the groundwork for creation of a bad bank to tackle bad assets.

The sector, under the auspices of the Indian Banks Association (IBA), has dusted off a proposal — prepared by a panel on faster resolution of stressed assets in public sector banks (PSBs) headed by former PNB Chairman Sunil Mehta — for submission to the Centre and the Reserve Bank of India. This panel had proposed an asset management company (AMC) for resolving large bad loans, called ‘Sashakt India Asset Management’, two years ago. While bankers are pushing for this, and there is support for the proposal within a section of the government, the broader view in the Finance Ministry is that PSBs are “well-capitalised” and private asset reconstruction companies already exist in the banking system.

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A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions, which in turn will clear their balance sheet. Rating firm Crisil has said NPAs are set to rise by 150-200 basis points this fiscal as banks turn cautious. “Lockdown will impact collections and resolutions, and thus result in higher NPAs. The gross NPAs would be between 11-11.5 per cent for the base case and it could rise higher.”

“Discussions have taken place among banks. A final decision will be taken by the RBI and the government. What’s to be seen is whether the government will be ready to put in huge funds required to set up the bad bank or AMC. There were talks about creating a bad bank in 2018 and 2009. But nothing happened,” said an official aware of the development.

However, the structure of the proposed bad bank is still not clear, though there was speculation it will be a three-tier system involving asset reconstruction, asset management and secondary market. The Mehta committee had proposed an AMC and an AIF (alternate investment fund) to resolve NPAs over Rs 500 crore.

Explained

Govt refrained from idea of bad bank

While bankers are expecting significant equity contribution from the government towards creation of a bad bank, the Centre has in the past refrained from adopting such a model. The question is: does the nation need a bad bank as PSBs are well-capitalised and private asset reconstruction companies already exist?

Former RBI Governor Raghuram Rajan was against the bad bank concept saying that it created a moral hazard, enabling banks to continue with their reckless lending practices.

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However, former RBI Deputy Governor Viral Acharya had proposed two models to tackle stressed assets. The first model is a private asset management company (PAMC) which would be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness. The second model is a national asset management company (NAMC) for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term.

“The proposal of setting up of bad bank was discussed in the past, but it was not found viable as the government infused direct equity into PSBs, while they recognised their NPA levels and made adequate provisioning against them. As of now, our understanding is that PSBs are well-capitalised and private asset reconstruction companies already exist in the banking system. But we will see, let the proposal come to us,” a senior government official said when asked about the plan. In last the three fiscals, the Centre has infused equity of Rs 2.65 lakh crore into state-owned banks.

While bankers are expecting significant equity contribution from the government towards creation of such a bad bank, the Centre has in the past refrained from adopting such a model. Finance Ministry officials did not respond to queries seeking comments for the story.

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Many nations, such as the US, Finland, Indonesia, Belgium and Sweden, had set up bad banks. Success of bad banks depends on a number of factors. Chief among these is government support to help banks understand and manage the many regulatory, accounting, and tax issues, and, in some cases, to provide financial backing.

“Again, each country’s case is different, depending on the health of its banks, but broadly speaking, governments must smooth the way for the creation of bad banks and clearly establish the extent to which the state will assume the risk of the bad assets,” McKinsey said in a report.

Gross NPAs, which were close to Rs 9 lakh crore as of December 2019, are expected to cross the Rs 10-lakh crore mark again by the end of the year. While the RBI has already given three months’ moratorium on loan repayments, this is likely to be extended by another two or three months.

FM’s meet with heads of PSBs postponed

Finance Minister Nirmala Sitharaman’s review meeting with heads of public sector banks, which was scheduled to be held via video conference on Monday, has been postponed and a new date will be announced soon, a senior government official said.

Various issues, including credit deployment in the economy, implementation of relief measures announced by the government and interest rate transmission into the economy were expected to be discussed in the meeting. —ENS

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