Indian banks are reportedly mulling creation of a bad bank to deal with non-performing assets (NPAs) amid the ongoing coronavirus crisis. Various members of Indian Banks' Association (IBA) have given initial thoughts to set up a bad bank owing to the banking sector sitting on high provision NPAs, Rajnish Kumar, CMD of State Bank of India (SBI) said, CNBC-TV18 reported. "These are some initial thoughts at the IBA level and by many members in IBA," Rajnish Kumar said.
It's the right time to have such a financial structure since most banks are holding a very high level of provisions, negatively impacting credit and economic growth, Kumar was also quoted as saying. Kumar also said that only when banks reach a consensus, the next move could be taken. A recent report by The Economic Times had said that banks intend to ask for an initial contribution of nearly Rs 5,000 to Rs 10,000 crore from the government.
A bank may, over the years, accumulate a large portfolio of debts or other financial instruments which unexpectedly increase in risk, making it difficult for it to raise capital. This is where a bad bank or Asset Reconstruction Company (ARC) helps. Once it is formed, banks divide assets into two categories -- one with non-performing assets and risky liabilities and the other with healthy assets, which help them grow financially. The goal of the segregation is to allow investors to assess the bank's financial health with greater certainty.
Though first pioneered in the US in 1988, the idea of forming a bad bank in India was initially floated in January 2017 when the Economic Survey of India suggested setting up a Public Sector Asset Rehabilitation Agency (PARA).