Indian banks could see a rise in bad loans from retail and MSME segments, said State Bank of India’s Managing Director Ashwini Kumar Tewari on Thursday even as he stressed that asset reconstruction companies must be adequately capitalised.
“We cannot have a system where we have a 20% growth year-on-year on MSME and retail and then an NPA (ratio) which will remain below 1% for retail. This is not sustainable, it has to align with the system,” he said.
Gross non-performing assets (NPAs) in the MSME segment are likely to rise to 10-11% by March 2024 from 9.3% as on March 31, 2022, credit rating agency Crisil and the Associated Chambers of Commerce and Industry of India said in a report released on Thursday.
Tewari said asset reconstruction companies (ARCs) must be adequately capitalised so that they be able to hold the assets for a longer period of time.
“ARCs need to be adequately capitalised and the capital has to be enough to hold it (the asset) for some time, otherwise, there is no valuation for sale. If you have to somehow sell it quickly within a year, the valuation discovered will be very low,” he said on Thursday at an event of the Associated Chambers of Commerce and Industry of India.
In addition to this, he said there should be a consolidation in the asset reconstruction industry and issues relating to the conflict of interest must be examined.
“While 28 ARCs may be okay for India’s size, it is just too many. If you set aside the top five or six, the others may have just one or two assets,” he said.
“Then there are stories around that it may be section 29 in a different manner,” he said pointing to a provision in the the Insolvency and Bankruptcy Code, which bars related parties from submitting a resolution application in insolvency proceedings.
“That is not good for the system as each such case leads to a reduction in trust among banks and ARCs. There is a section 29 examination of ARCs that has to be done very carefully,” Tewari added.