Indian Lenders Pitch ‘Bad Bank’ Idea To Government Once Again

The Indian Banks' Association is once again pitching the idea of creating a structure akin to a ‘bad bank', which can ease the burden of stressed assets on the books of Indian lenders. Bankers are keen that a chunk of bad loans be transferred to an independent asset management company for resolution, two bankers with direct knowledge of the matter said.

Preliminary discussions have started within the IBA and a proposal is likely to be sent to the government, the bankers quoted above said. The proposed AMC can be owned by a consortium of banks, the 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 purchase, 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 State Bank of India are 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 an asset quality review of the sector, it was proposed that the non-performing assets detected as part of the review be parked in a bad bank. Raghuram Rajan, who was then RBI governor, was opposed to the idea and felt that private asset reconstruction companies should take the lead in buying bad debt and resolving it.

Once again, in July 2018, a group of bankers led by then Punjab National Bank Chairman Sunil Mehta proposed an ARC structure to manage stressed loans. The Mehta committee had suggested that multiple such AMCs be created and investments be sought through Alternative Investment Funds set up by banks. The committee also suggested that bank ownership in the AMCs and AIFs should be limited to avoid conflict of interest.

Each time the idea was suggested it ran into two key hurdles. First -- who would capitalise the bad bank? Second -- how would the criteria and price of bad loan purchases be designed, while ensuring transparency and fairness?

According to the first of the two bankers quoted above, in 2018, banks did not have the adequate provisioning against stressed loans, which limited their ability to take haircuts on asset sales. Now, since most banks have a provision coverage ratio of 60-70 percent against stressed accounts, they are better positioned to transfer stressed assets to an AMC at adequate haircuts, he said.

According to an estimate by CARE Ratings, gross bad loans on the books of Indian banks are at 9.3 percent of gross advances as of December 31, 2019, as compared with 11.35 percent a year ago. Bad loan ratios for banks are expected to worsen in the current financial year as banks grapple with the after effects of a national lockdown in the wake of the COVID-19 pandemic.

Rating agency Crisil, in a report on May 1, said that the gross NPA ratio across the banking sector may rise to 11-11.5 percent in FY21.