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Government rejects bad bank proposal to resolve NPA crisis: Report

Government rejects bad bank proposal to resolve NPA crisis: Report

The government is also, at best, lukewarm to the idea of an asset reconstruction company (ARC) to take over the public sector banks' toxic loans as it's not keen on diverting more of taxpayers' money toward their resolution in this manner.

Last month, Interim Finance Minister Piyush Goyal told reporters that the Centre has set up a committee of bankers to look into the possibility of forming a bad bank. Goyal had added that the panel, to be headed by the Punjab National Bank (PNB) Chief Sunil Mehta, would first find out if it's a viable option for the Indian banking system.

Those enthused by the concept will be disappointed to learn that the government has reportedly rejected it. According to The Economic Times, the government is also, at best, lukewarm to the idea of an asset reconstruction company (ARC) to take over the public sector banks' (PSBs) toxic loans as it's not keen on diverting more of taxpayers' money toward their resolution in this manner.

A top government official further pointed out to the daily that the country boasts multiple ARCs and the resolution process under the Insolvency and Bankruptcy Code (IBC) is already tackling big cases of loan defaults. "It won't make much sense to have a bad bank for smaller non-performing assets (NPAs) as not much value can be derived from them," said the source, adding that banks are already being capitalised using taxpayers' money and some funds will also need to be invested in a bad bank directly or indirectly, something the government is not keen on.

So what is a bad bank? It is basically a government-funded agency designed to buy all the bad loans of banks. 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). The RBI, too, came up with a suggestion to form two entities to clean up the bad loan problems ailing PSBs - PAMC (Private Asset Management Company) and NAMC (National Assets Management Company).

The major benefit of forming a bad bank is asset monetisation. It would allow lenders to start afresh, thus boosting credit growth amid an economic revival. Experts also say that a bad bank can provide a parallel mechanism with the IBC, addressing existing gaps. For instance, bad loans in the power sector can't be resolved through the IBC system as factors like the lack of coal linkages and the absence of purchase power agreements make them unfit for a resolution through the IBC. In many cases, states don't sign PPAs as power can be bought for a cheaper price over exchanges. The bad bank structure could help banks park their money to separate agency to find a solution in long time.

Then, assets having future demand-supply issue face liquidation under the IBC but this problem can be solved under the bad bank. Many lenders are also concerned over huge haircuts they have to endure after a resolution through the IBC, and they think the bad bank can be a better solution.

The government's disinclination comes at a time when the PSBs' are announcing spiralling NPA figures. The 21 state-owned banks reportedly posted bad loans worth over Rs 6 lakh crore in the quarter ended March 31, up around 70 per cent year-on-year. Worse, the RBI's recently-released Financial Stability Report sees the Gross NPA ratio of scheduled commercial banks rising to 12.2 per cent of total loans in the current fiscal, up from 11.6 per cent in March 2018. The report added that the 11 PSBs under the RBI's prompt corrective action framework may experience "a worsening of their GNPA ratio from 21 per cent in March 2018 to 22.3 per cent by this fiscal-end". Under the framework, corrective actions ranging from restrictions on dividend distribution to restriction on branch expansion and management compensation get set in motion, depending on the risk threshold of the bank.  

The daily added that as per a Moody's report, the government's recapitalisation plan will broadly resolve the regulatory capital needs of the PSBs and help augment their loan-loss buffers, but will be insufficient to support credit growth.