Industry Body Calls For Creating Multiple Bad Banks To Buy Bad Loans In Budget 2021

Banks may see bad loans double despite signs of an improvement in the economic impact of the Covid-19 pandemic, a report from the Reserve Bank of India's Financial Stability and Development Council said on Monday. The gross non-performing assets of banks (NPAs) may increase from 7.5 per cent in September 2020 to 14.8 per cent under a severe stress scenario. Even under a baseline scenario it may rise to 13.5 per cent by September 2021, the council said.

Meanwhile, industry body Confederation of Indian Industry (CII), in its Pre-Budget Memorandum 2021-22, has made a recommendation to the government to create multiple bad banks by allowing Alternate Investment Funds (AIFs) to buy bad loans.

“The financial sector, particularly the lending side, is a critical artery of the economy and its robust operations are a key pillar in India's journey to a $5 trillion economy. It is worthwhile to consider whether it is a time to review are financial structure in a manner that is comprehensive and can support the economic needs of India's real sector,” CII said in its Pre-Budget Memorandum 2021-22.

“Hitherto the NPAs have largely been sold to Asset Reconstruction Companies (ARCs) only and mostly not for cash consideration which means that the sale price was not a ‘true sale' since ARCs could pay through ‘Security receipts' (SR). SR is basically an instrument wherein the payment is made only upon recovery of some money — a sort of participatory note. Based on recent RBI data on outstanding SRs, industry estimates the net recovery at only around 10-12 per cent. The outstanding SRs is Rs 1.46 lakh crore. This represents the ‘non-cash' consideration received by banks against sale of loans,” CII said.

“The need of the hour is to increase avenues for ‘cash' realisation against sale of loans and to increase avenues for capital to compete for such loans to maximise realisation for banks. The best way to achieve this is to open up the buy side and enable a clear path for capital to flow for purchase of NPA. AIFs and Foreign Portfolio Investors (FPIs) may be permitted to purchase NPAs and compete with the ARCs,” CII added.