A new bad bank won't help unless existing problems are sorted: CEA

Krishnamurthy Subramanian also says India's sovereign rating being maintained and stable outlook by S&P is good news, considering India wants to list its sovereign bonds on global indices

Chief Economic Advisor Krishnamurthy Subramanian said on Thursday that unless issues regarding banks taking substantial haircuts on sale of toxic assets were resolved, a bad bank would be of little help in addressing problems of non-performing assets in the financial system.

Speaking at a media briefing on recent actions by global ratings agencies, Subramanian said India’s sovereign rating being maintained and the stable outlook by Standard & Poor’s was good news, especially since the country is looking to list its sovereign bonds on global indices.

“This clears the path for us.”

He said India’s fundamentals demand a much better sovereign rating and the country’s willingness and ability to repay debt is “gold standard”.

“There are 28 asset reconstruction companies that are functional. And their job is to take bad loans from banks and act as bad banks. But one key part that needs to be kept in mind is when a bank sells bad loans, it has to take a haircut. When it takes a haircut that impacts its balance sheet. And that is one of the key aspects affecting the selling of loans. So, till that is not addressed, creating a new structure may not be as potent in addressing the problem,” Subramanian said.

He said that Fitch and S&P had forecast a gross domestic product (GDP) growth of 9.5 per cent and 8.5 per cent for 2021-22, albeit on lower base effect from 2020-21, and had acknowledged the efforts made by the Narendra Modi government before the pandemic.

S&P, on Wednesday, affirmed its rating on India’s long-term foreign and local currency sovereign credit at the lowest investment grade with a stable outlook, saying the country’s economy remains “a long-term outperformer versus peers at a similar level of income”.

The rating action by S&P came days after Moody’s Investors Service downgraded India’s rating by a notch. S&P, however, said the impact of the Covid-19 outbreak posed a significant challenge to the country’s economic growth trajectory. It said economic growth and the fiscal situation of the Centre and states would improve by next year, and hoped the reforms initiated by the government would bear fruit in the long run.

“The ratings agencies have also spoken about debt sustainability and how they expect the general government debt-GDP ratio to remain sustainable,” Subramanian said.

When asked of the possibility of the Reserve Bank of India directly monetising the Centre’s fiscal deficit in the remaining part of the year, Subramanian said: “There have been comments on monetisation that span the spectrum. The finance ministry has evaluated various options, including this. Like with anything else, we keep all options under consideration and keep evaluating them.”

Subramanian said the Centre’s plan, announced by Finance Minister Nirmala Sitharaman in the 2020-21 Union Budget, of getting sovereign bonds listed on global indices, was on track. However, he added that he does not expect much inflows from that route this year because of Covid-19.

“These indices track $4 trillion in capital every year. Even if we are at the lower end, we can raise $60 billion. This is an extremely important step in long term,” he said.

“Even if there was no pandemic due to Covid, first year returns would have not been that good. Given the pandemic, not much money may come this year. So I would say that the amount this year would be quite uncertain.”