Even as mounting bad loans have put Indian banks in a pincer-like situation, the idea of a government-backed ‘bad bank’ has kicked off quite a debate.
‘Bad bank’ concept allows a government-supported entity to buy bad loans from stressed banks at a fair price (discount). Such an entity will then be responsible for recovering the debt.
The objective is simple – to help banks clean up their books, and use their capital resources (which are otherwise locked up in making provision for bad loans) for funding the growth in credit needs.
The current debate also comes close on the heels of Italy and the EU inking an agreement to allow the Italian banks sell their NPA (non-performing assets) portfolios to private investors with government guarantee.
Ms. Elke Koenig, the head of Single Resolution Board, the Europe’s new banking resolution authority, even felt that the Italian option could “also be suitable for other countries.’’
Given the context, the discussion is indeed relevant. The Reserve Bank of India Governor, Dr. Raghuram Rajan, however, has said that there is no need for a separate `bad bank’ to deal with the stressed assets of public sector banks.
Pointing out that these public sector banks are backed by the Government, he has argued against creating a new entity. A national asset re-construction company (ARC) or `bad bank’ – given its size and expertise - can fetch multiple advantages to stakeholders, and bring about a quicker resolution to the recovery problems posed by the NPA imbroglio.
But is it that simpler? Not really, especially in the context of public sector banks.
The NPA levels of these banks are over Rs.3 lakh crore. How much of these can be absorbed by such an ARC or `bad bank’? Even allowing for a discounted price for such purchases, the effort requires quite a funding from the Government.
A resource-constrained Government will have difficulty in providing money for this. Elsewhere in the globe, national ARCs were funded by issuing long-term Government-guaranteed bonds.
There are larger questions, however. Will that not tantamount to condoning the mismanagement of banks?
Will that not breed a sense of laxity in the banking system? Is it right to throw more public money after failed money.
These imponderables will significantly impact the decision-making process in this regard. More than anything else, the country needs an ecosystem – both in the banking and legal spheres – that fosters a framework that is just and fair to all stake-holders, and which helps in speedy resolution of the entire debt recovery process. Surely, ARC alone is not the cure for the ills of banks.
