Govt considering SPV to buy bad loans of banks

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New Delhi, Nov 2: The government is considering floating a special purpose vehicle (SPV) that would buy non-performing assets, or NPAs, of domestic banks. Bank NPAs are expected to enlarge over time.

The proposal for creating an SPV is being debated by the finance ministry and the regulators as a pre-emptive step to protect the financial sector from widespread defaults; it is learnt from government sources.

The subject is likely to figure in finance minister P Chidambaram’s meeting with heads of the public sector banks on Tuesday. The global financial crisis has choked liquidity around the world and raised across-the-board defaults and delinquencies. As a result, banks in India have become risk-averse in lending. The government thinking is that an SPV will help banks get rid of their bad assets and free up the capital for lending. This would improve liquidity conditions in the market and bank balance sheets.

Officials recognise that as the crisis lingers on the proportion of bad assets are bound to increase. Indeed, during the July-September 2008 quarter, net non-performing advances of ICICI Bank grew 42.47% to Rs 4,232.93 crore against Rs 2,970.94 crore for the same period last year. Net NPAs as a percentage of net advances rose to 1.91% compared with 1.43% in the same quarter last year. The consolidated net NPA ratio of the bank and its subsidiaries was at 1.60%. In contrast, the net NPA ratio of SBI improved to 1.34% as of September 2008 (1.42% in June 2008). Gross non-performing assets of HDFC Bank stood at 1.57% of gross advances for the quarter ended September 2008 while its net NPA is at 0.57% of net advances.

“Over the coming six months, NPAs might go up, and in addition to questions about liquidity, questions about insolvency will also become important,” according to a latest NIPFP-DEA research paper. The net NPA ratio, which is used to measure the overall quality of banks’ loan book, stood at 1% in 2007-08 for all banks operating in India, according to RBI data.