The Indian Banking Association is once again launching the idea of creating a “bad bank” like structure, which can ease the burden of stressed assets on the books of Indian lenders. Bankers want a portion of the bad debts to be transferred to an independent asset management company for resolution, said two bankers with first-hand knowledge of the matter.
Preliminary discussions have started within the IBA and a proposal is likely to be sent to the government, the bankers cited above said. The proposed AMC can be owned by a consortium of banks, government, private sector investors and global funds, the bankers said.
The AMC will be managed by independent professionals, who will identify the right assets to buy, the price at which to buy them and make decisions on resolution plans, the bankers said.
The Economic Times first reported on Thursday that banks led by the State Bank of India were considering setting up a bad bank-like structure to house and revive bad loans. SBI Chairman Rajnish Kumar did not immediately respond to calls from BloombergQuint.
The idea of a bad bank is not new.
In 2015, when the Reserve Bank of India embarked on a review of the sector’s asset quality, it was proposed that non-performing assets detected in the review be parked in a bad bank. Raghuram Rajan, then governor of the RBI, opposed the idea and said private asset rebuilding companies should take the initiative to buy bad debts and resolve them.
Once again, in July 2018, a group of bankers led by the chairman of the Punjab National Bank, Sunil Mehta, proposed an ARC structure to handle distressed loans. The Mehta committee had suggested that several of these AMCs be created and that investments be sought through alternative investment funds set up by the banks. The committee also suggested that bank ownership in AMCs and AIFs should be limited to avoid conflicts of interest.
Whenever the idea was suggested, it encountered two key obstacles. First, who would capitalize the bad bank? Second, how would the criteria and pricing for bad loan purchases be designed, while ensuring transparency and fairness?
According to the first of the two bankers cited above, in 2018, banks did not have adequate provisioning against stressed loans, which limited their ability to take discounts on asset sales. Now, since most banks have a 60-70% provision coverage ratio to stressed accounts, they are better placed to move stressed assets to an AMC with adequate haircuts, he said. .
According to an estimate by CARE Ratings, gross bad loans on the books of Indian banks represent 9.3% of gross advances as of December 31, 2019, up from 11.35% a year ago. Bad loan ratios for banks are expected to worsen in the current fiscal year as banks grapple with the aftermath of a nationwide lockdown in the wake of the COVID-19 pandemic.
Credit rating agency Crisil, in a May 1 report, said the gross NPA ratio in the banking sector could reach 11-11.5% in FY21.