Minister Arun Jaitley will hold a meeting on Friday with Reserve Bank of India (RBI) Governor Urjit Patel
and other top central bank officials to discuss the burgeoning toxic asset levels in the banking system and to draw up a possible structure of a state-owned ‘bad bank’ or asset management company (AMC) that will take over non-performing assets
(NPAs) and enable banks
to clean up their balance sheets.
Also, issues such as how much of a haircut a bank must undertake in different stress account cases and the state of existing asset reconstruction companies (ARCs) will likely be discussed, Business Standard
has learnt from finance
ministry and RBI
sources. The meeting will happen over video and will be attended by Patel and all RBI
While the ‘bad bank’ or AMC will be largely in line with what the RBI
Deputy Governor Viral Acharya
has proposed, officials in the RBI
and the finance
ministry’s department of financial services are working on its possible structure.
Sources said two proposals were being worked upon. The first involves setting up an AMC in which the Centre holds a 49 per cent stake, with private funds and investors holding the rest. This structure is similar to the National Investment and Infrastructure Fund (NIIF). The second proposal envisages expanding the scope of the Rs 40,000 crore NIIF to take over the toxic assets.
“A presentation is being prepared on these proposals for the finance
minister and the RBI
governor. Only after they have taken some decisions will the proposals go the Prime Minister’s Office,” a government
The total gross NPAs
in December 2016 was more than Rs 6 lakh crore. Estimates suggest the total stressed assets
put in various baskets of technicalities are at least 12.5 per cent of banks’ total loans, or about Rs 9.5 lakh crore. More than half of the present stress came to the fore after the RBI’s asset quality review last year.
Acharya had proposed two AMCs, a private one to handle cases that could be turned around quickly and a quasi-government
AMC for projects that needed nurturing for a long time.
According to an official at the central bank, Jaitley wants serious discussions on the issue. “The government
for long has been trying to float a ‘bad bank’. The deputy governor’s ideas are worth considering in that respect,” said the official.
The minister was also expected to discuss the state of ARCs and might re-examine their capital requirements, said the source. Besides, banks’ reluctance to sell assets
to these companies at a fair price would likely be discouraged.
are not able to recover dues in a time-bound manner, then there is no point in holding on to the assets.
This eats up precious capital,” said the official.
However, all will boil down to how much of a haircut a bank should take in case of stressed asset restructuring. Acharya had suggested if a bank was not able to dispose assets
quickly, a time correction should be allowed. This could be one of the main discussion points in the meeting.
In the 2016-17 Economic Survey, Chief Economic Advisor Arvind Subramanian
had proposed the setting up of a Public Sector Asset Rehabilitation Agency, to take over toxic assets
not only of banks
but also directly from companies.