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Budget 2021: How bad bank model of ARC, AMC, AIF would work

Budget 2021 news: Currently, the banks have gross NPAs of around 7 per cent which is expected to rise to 15 per cent by September this year if the situation deteriorates

twitter-logoAnand Adhikari | February 1, 2021 | Updated 13:25 IST
Budget 2021: How bad bank model of ARC, AMC, AIF would work
Union Budget 2021-22: The banks burdened with stressed assets and limited capital will find it difficult to manage the NPAs. There is also limited capital that the government can provide

The Union Budget 2021 -22 has proposed setting up of a bad bank under the ARC (asset reconstruction company), AMC (asset management company)  and AIF (alternative investment funds) model to acquire, manage and turnaround bad loans.

The ARC will acquire bad loans from banks at a negotiated price (at a discount from book value) and pay by way of cash and security receipts. The funds for buying the bad loans will come from the sponsors (government and banks etc) as well as alternative investment funds.  The AMC will restructure and turnaround the bad loans and charge a fee.

Currently, the banks have gross NPAs of around 7 per cent which is expected to rise to 15 per cent by September this year if the situation deteriorates. The Covid disruption has already created a lot of stress in the banking system.

The current forbearance framework hides the actual NPAs. Take for instance, the RBI has provided a two-year loan restructuring to retail as well as corporate borrowers. In addition, the Supreme Court had earlier directed that loan accounts which were not declared NPAs till August 31, 2020  will not be classified as NPAs till further notice.

The total stress in the banking system would be in excess of Rs 15 lakh crore. The banks burdened with stressed assets and limited capital will find it difficult to manage the NPAs. There is also limited capital that the government can provide. This is where the bad bank model would step in and help both the government and banks.

Also read: Union Budget 2021: After IDFC, ICICI and IDBI's conversion into banks, govt proposes new DFI

The bad bank idea was first floated in the Economic Survey 2017. In fact, there is already IBC (Insolvency and Bankruptcy Code) to deal with bad loans, but recovery rate is not higher. The current framework of  bankruptcy code is not yielding a good value for banks. For many assets, the sale has to be done at a dirt cheap price, which comes at a loss to banks

In addition, there are dozen of ARCs in the market. The existing ARCs also have limitations in terms of capital or the funds to buy large assets. In fact, the banks are not very happy with ARC sale as the realisations from bad loans are very low.

The proposed Bad Bank has to better than both the IBC and the ARCs in terms of 'pricing' and also 'faster recovery.'

The bad bank will go a long way in housing the assets of national importance - the power assets, roads , steel and other infrastructure assets. These assets will have value for banks in future and also the country.

But there are challenges for the government in the bad bank. Clearly, there is no room for using taxpayers' money for setting up a bad bank. The capital should come from private funds. There are already global distressed funds interested in India. There are also private equity players which the government should rope in

The management of a bad bank has to be with professionals. The bad bank should not become a platform for bankers on deputation or post retirement job for bankers. There has to be industry expertise with eminent members on the board.

Also read: Budget 2021: Relief for depositors! Now 'time-bound' access to deposits if bank goes bust

Also read: Budget 2021 speech highlights: IPO of LIC to come in 2021-22, says FM

Also read: Budget 2021 Live Updates: Senior citizen pensioners over 75 years of age exempted from filing I-T returns

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