Finance ministry doubts efficacy of a 'bad bank'

Setting up a new institution could only delay the resolution process, said key official

Amid a fresh debate on the concept of a 'bad (loans) bank' to deal with stressed assets in the banking sector, many in the finance ministry questioning if this is needed.

A key official argued that constitution of a new institution to deal with stressed assets would only delay the resolution of bad loans that has plagued state-run banks.  

Besides, he said on condition of anonymity, this institution will not be doing anything fundamentally new that the government or state-owned banks are not already doing to address the issue of non-performing assets (NPAs). 

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“All public sector banks (PSBs) are being capitalised by the government. The so-called ‘bad bank’ will also work on behalf of the government. What will be there that is not already happening?” he asked.  

In line with the announcements made under the 'Indradhanush' scheme and the Union Budget, the government had decided last year to recapitalise PSBs by Rs 70,000 crore over four years. In July, it allocated Rs 22,915 crore to recapitalise 13 of these, including the biggest one, State Bank of India. The sum is 92 per cent of the budget provision of Rs 25,000 crore. 

The country’s state owned-banks, reeling from a record level of NPAs, require additional capital to not only meet capital adequacy standards but also for the Basel-III norms, to take effect from 2018. 

“Setting up a new institution could only delay the resolution process. It will require setting up a company, articles of association, picking people to run it, etc. I do not see it doing something fundamentally very different from the current set-up. If it will, we could look at that,” said another official. 

A 'bad bank' was proposed to take over stressed assets of PSBs, enabling these lenders to focus on normal commercial activity. Stressed assets in the banking system rose to 12 per cent of the total in June, from 11.4 per cent at the end of March. The net combined loss for the 25 listed PSBs was Rs 1,193 crore in the financial year's first quarter, ended June, against a net profit of Rs 9,449 crore in April-June 2015. 

Reserve Bank of India (RBI) governor Urjit Patel, during the policy announcement earlier this week, said dealing with stressed assets needed creativity and the central bank was working with the government on this. His predecessor, Raghuram Rajan, had early this year shot down the idea of a bad bank. "PSBs themselves have the backing of the government. So, there is no need to create a new entity that has the backing of the government. The issue is now to clean it up," he'd said. 

RBI launched a clean-up exercise last year, named Asset Quality Restructuring. This required banks to provision far more for their NPAs. The move severely hit their earnings. Rajan had also said the pricing of assets of a government-owned bad bank could get entangled with the Comptroller & Auditor General or the Central Vigilance Commission.

The idea of a bad bank was drawn from various countries that had set up such entities following a crisis, such as the Troubled Assets Relief Program set up by the US treasury department after the collapse of Lehman Brothers in 2008.
UNDER STRESS

• A ‘bad bank’ was proposed to take over stressed assets of PSBs, enabling these lenders to focus on normal commercial activity
   
• Officials argue that constitution of a new institution would only delay the resolution of bad loans that has plagued PSBs
   
• Says the so-called ‘bad bank’ will also work on behalf of the government. What will be there that is not already happening