‘Bad Bank’ not a good idea without resolving these issues first, explains Uday Kotak

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June 8, 2020 5:00 PM

Unless issues such as transparency, recovery rate, transfer price, and governance, are resolved, bad banks can not give desired results.

bad bank, NPA, non-performing asset, bad loans, stressed assetsA bad bank is set up to buy the bad loans and other illiquid holdings of another financial institution, at market price.

A Bad Bank, proposed by economists and experts, could be of good use only if it helps improve the recovery of bad loans, otherwise, it does not make any sense, prominent banker and new CII President Uday Kotak said. Unless issues such as transparency, recovery rate, transfer price, and governance, are resolved, bad banks can not give desired results, Uday Kotak said in an interview with PTI. Recalling the experience of Stressed Assets Stabilization Fund (SASF), set up by IDBI Bank, he said that it did not work well as it could only recover less than half of the NPA cases aggregating to Rs 4,000 crore by the end of March 2013.

A bad bank is set up to buy the bad loans and other illiquid holdings of another financial institution, at market price. Given the mounting NPAs of banks, the Indian Banks’ Association (IBA) had submitted a proposal to the finance ministry and the RBI last month, to set up a bad bank for nearly Rs 75,000 crore worth of NPAs. It also requested the government to provide Rs 10,000 crore of initial capital.

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The idea of a bad bank keeps on surfacing at frequent intervals, as stressed assets in the banking sector surge. Uday Kotak underlined that the government was considering the idea of creating a bad bank in 2016 and even the Economic Survey 2017 had suggested the creation of a bad bank called Public Sector Asset Rehabilitation Agency (PARA) to curb the problem of stressed assets. Discussions on the creation of a bad bank again took place in the Financial Stability and Development Council (FSDC) meeting last month.

Meanwhile, the Managing Director of Kotak Mahindra Bank, Uday Kotak, also said that bad banks are national assets created out of public money, therefore, the system must have the ability to be able to recover more. At present, the banks sell bad loans to asset reconstruction companies (ARC) as per the norms of the RBI. 

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