Finance Minister Piyush Goyal on Friday said that a committee will come out with its recommendations on setting up an asset reconstruction or an asset management company for faster resolution of bad loans — a concept that’s similar to the idea of ‘bad bank’. This idea has been floating around for quite some time — and even made it to the Economic Survey Report 2017. The concept of bad bank is where a company or bank could buy up NPAs of all other banks or financial institutions and help clean-up their balance-sheet.
The country is currently reeling under NPAs (non-performing assets) worth about Rs 9 lakh crore, which the government is trying to resolve using multiple apparatus: Bank recapitalisation, Insolvency and Bankruptcy Law etc. Piyush Goyal on Friday told reporters that a committee will consider whether such an arrangement (similar to bad bank) will be good for the banking system. He made the announcement after a meeting with public sector banks from the western and southern region on the banking crisis.
In the Economic Survey Report 2017, Chief Economic Advisor Arvind Subramanian echoed Deputy RBI Governor Viral Acharya’s approach to tackle bad loans. Arvind Subramanian said that there was an urgent need for India to create a ‘bad bank’ that could buy up bad debts from lenders to restructure them.
The idea that was proposed then was of the creation of ‘bad bank’ as a centralised agency that would take over the largest and most difficult stressed loans from public sector banks in order to help clean their balance sheets, and would take politically tough decisions to reduce debt, providing an impetus to further lending to spur economic activity. The Economic Survey gave it a name: Public Sector Asset Rehabilitation Agency (PARA).
However, the idea had its own critics, including former RBI governor Raghuram Rajan, who said that it would simply mean the transfer of NPAs from one entity to other. The ‘Twin Balance Sheet’ (TBS) problem requires focus to be on debt-restructuring.
In February, the Reserve Bank of India (RBI) scrapped over a dozen debt-restructuring processes and replaced them with one framework that laid down a strict timeline for asset resolution in line with newly adopted IBC law. Meanwhile, the IBC law is taking its course with two of the biggest bad loans accounts resolved and rest at different stages of resolution.
The government, in October last year, announced an unprecedented Rs 2.11 lakh crore bank recapitalisation plan, of which Rs 88,000 crore was infused into public sector banks in January. However, the government seemed non-committal on the timeline of releasing the second tranche of the recap plan. On being asked about the need for more fund infusion into the PSU banks, Piyush Goyal said on Friday that it was too early to judge if such a need existed.
In wake of Rs 13,000 crore fraud at the Punjab National Bank (PNB) and higher NPA provisioning leading to losses in the PSU Banks, both Moody’s and Fitch said that the Rs 2.11 lakh crore would not be enough for the banking system.