As the disruption of the economy on account of the coronavirus is into its third month, much attention has focussed on the threat of non-performing assets (NPAs) at banks soaring.
A week ago, media reports claimed government officials were worried NPAs could double to 18-20 per cent by the end of the fiscal year, as 20-25 per cent of outstanding loans faced a risk of default. Indian banks already had non-performing assets equivalent to $123 billion, or about 9.1 per cent of their total assets, at the end of September 2019.
Now, a lobby of banks in India has tapped the government to form a 'bad bank'. Reuters reported on Wednesday that the Indian Banks' Association wants the government to set up an asset reconstruction company at an initial cost of $2 billion. "The banks have proposed that the government set up an asset reconstruction company (ARC) to initially buy non-performing loans worth up to a total of 1 trillion rupees ($13.3 billion)," Reuters reported, quoting sources in the banking industry. The IBA has drafted a proposal for an asset reconstruction company and sent it to the RBI and government for approval.
“The government needs to put in anywhere between 100 billion rupees to 150 billion rupees ($1.3 billion-$2 billion) to form the ARC where the bad loans can be transferred,” Reuters reported.
Giving details of the proposed company, Reuters claimed it was likely to be named the "National Asset Reconstruction Company Ltd". The company will be set up for an initial period of 10 years, Reuters reported. For a NPA to qualify to be bought by the National Asset Reconstruction Company Ltd, it should be worth at least Rs 5 billion, the report claimed.
"The ARC would pay the lenders at least 15 per cent of the present net value of the loans it buys in cash, while the remaining would be paid in the form of security receipts... The receipts can be redeemed by the banks once the account has been settled or sold to other investors in the secondary market," Reuters reported.
In addition, the IBA has proposed a separate asset management company and an alternate investment fund "in which banks and other private companies could participate by managing the stressed assets to secure better valuations", Reuters reported.
Not 1st ‘bad bank’ proposal
This is not the first time the concept of a ‘bad bank’ has been proposed. It has been proposed multiple times since 2015 as the problem of NPAs started growing. However, the proposals had made little headway given issues such as inadequate capital and lack of buyers. In 2015, then RBI governor Raghuram Rajan opposed a proposal by bankers for a ‘bad bank’, arguing that private asset reconstruction companies should move to buy bad loans.
“In the economic survey for 2016-17, then chief economic adviser Arvind Subramanian also suggested a bad bank. The idea found the support of former RBI deputy governor Viral Acharya in a speech in March 2017,” Bloomberg Quint reported recently.
