It's a
commonly known fact that India's public-sector banks are in a bad shape. Then
why would anyone want to create another 'bad bank' from scratch? Well, the idea
of setting up a bad bank doesn't mean a bank that would be bad in its business
but that it will take over bad business of other banks. A bad bank handles the
bad business of other banks, freeing them of the burden of resolving their bad
loans themselves.
Why is the bad bank in news?
The government has set up a committee under
Punjab National Bank non-executive chairman Sunil Mehta to consider the
establishment of an asset reconstruction or asset management company in yet
another push to help resolve the bad loan burden that afflicts the banking
industry. That company will be what is generally called a bad bank.
What is a bad bank?
A bad bank
is an entity or structure that buys non-performing assets (NPAs) or distressed
loans from banks and financial institutions (FIs), mostly at a discounted
market price. It then works to recover and turnaround the assets through
professional management, sale or restructuring.
This
helps banks or FIs clear-off their balance sheets by transferring the bad loans
and focus on its core business lending activities.
Addressing
the media after a long brainstorming session with heads of PSBs in Mumbai on
Friday, Piyush Goyal, who temporarily holds additional charge of the finance
ministry, said a committee under Punjab National Bank’s non-executive chairman
Sunil Mehta, has been formed.
The
committee members will include SBI Chairman and one of its Managing Directors
and Bank of Baroda CEO who will appraise the desirability of an ARC and frame
the possible modalities of its structure and framework in next two weeks.
How 'bad' are India's PSU banks
The 21 banks majority-owned by the government,
which account for two-thirds of banking assets in the country, hold close to 90
percent of bad loans.
Gross NPAs of banks increased to around Rs 10.3 lakh crore,
or nearly 11.2% of advances, as on March 31, 2018, compared with Rs 8 lakh
crore, or around 9.5% of advances, as on March 31, 2017. Higher provisioning
and the resultant losses have materially eroded the Rs 1.2 lakh crore of
capital raised by PSBs last fiscal, of which Rs 90,000 crore was from the
government in the form of a bail-out plan. Crisil has said the government's
bailout plan may not be enough. “Given the higher-than-expected losses
last fiscal, probable loss in the current fiscal, and recall of the Additional
Tier 1 instruments by a few PSBs, the Rs 2.1 lakh crore recapitalisation
program announced in October 2017 may be insufficient to meet the capital
requirements of PSBs by the end of this fiscal.
Success or Failure?
The
concept of a bad bank has been experimented in several countries especially
after the financial crisis of 2008-09. It has witnessed some success in places
like Malaysia, Sweden, Spain and few other countries.
In
theory, the concept works well. However, it must be properly implemented and
can probably be the starting-point for broader reforms to turnaround the
banking sector, which is the backbone of any economy.
Experts
have argued that the existing ARCs whose functions are largely confined to
recovering stressed loans through liquidation of asset can’t address the
problem.
Former
RBI governor Raghuram Rajan also said that it would simply mean the transfer of
NPAs from one entity to other. However, the larger focus must be on the ‘Twin
Balance Sheet’ (TBS) problem of corporates and banks.
For
a bad bank to find success, lenders will require to assign a realistic value to
banks’ soured loans and also cooperation from the promoters of those assets.
This
would mean banks may have to take hefty hair-cuts or discounts while selling
the loans, even at the cost of their profitability. Further, equity may be
required from owners and private investors.
Two
weeks later, the banking sector might see more clarity on the structure and
modalities of the bad bank, if at all the idea gets implemented. Meanwhile,
banks continue to hope improved recovery from the ongoing time-bound
resolutions under the insolvency and bankruptcy code (IBC).
If
implemented, this may come to aid the 19 public sector banks of the total 21,
which have made losses worth nearly Rs 60,000 crore in the January to
March period this year. Strict
provisioning norms to set aside capital for bad loans, losses in bond portfolio
and a string of scams are straining the balance sheets and finances of most
state-owned banks, especially the ones under PCA.
Bad loans or gross non-performing assets (NPAs) with these
government-owned banks touched a staggering Rs 10.25 lakh crore as of March
2018.
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