What is “bad bank” and can it solve NPA problems?

NEW DELHI: After plunging to historic lows with Covid-hit 2020, the Indian economy is fighting back. The pandemic dealt a crippling blow to the economy, which suffered an unprecedented 23.9% contraction in the April-June quarter.
But 2021 has started on a positive note.
The International Monetary Fund (IMF) predicted that India would regain status as the world’s fastest growing economy and forecast growth of 11.5% this year.
The government has taken several measures to get the Indian economy affected by Covid-19 back on track. But much more is expected in the budget.
Finance Minister Nirmala Sitharaman has already announced that the 2021 budget will be like “never before”.
One of the main challenges that finance ministers have faced over the years is the growing number of doubtful debts banks – non-performing assets or NPAs.
According to Reserve Bank of India (RBI), Governor Shaktikanta Das, “Maintaining the health of the banking sector remains a political priority and preserving the stability of the financial system is a primary objective. ”
The RBI in its financial stability report warned that the gross NPA ratio could drop from 7.5% in September 2020 to 13.5% by September 2021.
This will be the highest in over 22 years and will put pressure not only on our banking system but also on the economy.
Several businesses and millions of individual borrowers are struggling to repay their loans due to the Covid-19 pandemic and the accompanying economic crisis.
This has led to a worrying increase in banks’ NPAs, putting them under serious strain.
When does a loan get “bad”
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
A “non-performing asset” (NPA) has been defined as a credit facility on which the interest and / or principal payment has been “past due” for a specified period of time.
The period specified from 1995 is two quarters.
So what is the solution?
Several leading economists believe that the “bad bank” might be a good idea to free banks from the growing burden of postcode.
In May, the Indian Banks Association (IBA) suggested to the Ministry of Finance and the RBI to create a bad bank.
The Confederation of Indian Industry (CII) has also called on the government to consider “several bad banks“to process NPAs from government-owned lenders.
CII President Uday Kotak believes the impact of Covid-19 is expected to exacerbate the problem of non-performing assets (NPAs), affecting the credit cycle. He suggests facilitating the proliferation of bad banks, by allowing alternative investment funds (AIFs) to buy bad debt.
What is a bad bank
A “bad bank” is a bank that buys bad loans from other lenders and financial institutions to help them clear their balance sheets. The failing bank then resolves these bad assets over a period of time. When banks are freed from the burden of the NPA, they can look more positively on new loans. Ideally, such a bank should belong to the banks that have the most NPAs.
Why should the government take the lead on bad banks?
Economic Affairs Secretary Tarun Bajaj said all options, including setting up a failed bank, were under consideration by the government to improve the health of the banking sector.
The government needs to take the lead as it dominates the country’s banking system.
What RBI Governors Are Saying About The Bad Bank
Shaktikanta Das
“Bad banks have been under discussion for a long time, we are open to any proposal on bad banks. It is up to the government to come up with such a proposal, and if so, we will consider the proposal.”
Former Governor Raghuram Rajan
Former RBI Governor Raghuram Rajan also suggested that the government privatize some public sector banks (PSBs) and create a bad bank to deal with NPAs and dilute the role of the financial services department.
In an article co-authored by Rajan and former RBI Deputy Governor Viral Acharya, both noted that the government obtains enormous power by directing bank lending. This power is sometimes exercised to advance public objectives such as financial inclusion or the financing of infrastructure.
“The reprivatization of certain PSBs can then be undertaken as part of a carefully calibrated strategy, calling on private investors who have both financial expertise and technological expertise; companies must be prevented from acquiring large shareholdings, given their natural conflicts of interest. , the newspaper said.
Mixed reviews
For the post-Covid recovery, it is quite important that banks are freed from their bad debt burden. One of the ways to get rid of them quickly is to sell them to a bad bank.
Being one of the main engines of economic growth, banks and financial institutions are the formal channels of credit.
With the pandemic crippling the incomes of businesses and individuals, thereby affecting their ability to repay loans despite the announcement of the RBI’s loan moratorium, a bad bank may be able to offer respite and allow recovery. fearless lending activities.
However, there have been different opinions on this as well. In June of last year, Chief Economic Advisor (CEA) KV Subramanian said that starting a bad bank might not be a powerful idea because there are already many asset rebuilding companies. (ARC) in business and the banks have failed to sell bad debt to them. In addition, when a bank sells bad loans, it must sell them at a discount and therefore proceed to a discount.
Therefore, it will be interesting to see if the Center ultimately opts for the establishment of a bad bank in the system.

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