'Bad bank' could help if designed right: RBI Deputy Governor Viral Acharya

Banks recorded stressed loans of $133 billion, or 12.34% of their total loans, as of last September

The Reserve Bank of India (RBI) Deputy Governor Viral Acharya on Wednesday joined the debate over creating a so-called "bad bank" to handle record sour assets in the nation's banks, saying it could help if "designed properly".

Banks in India had record stressed loans of $133 billion, or 12.34 per cent of their total loans, as of last September.

About two dozen state-owned lenders, which own nearly 70 per cent of India's banking assets, have an even higher stressed-loan ratio of 15.88 per cent, according to data compiled by India's central bank.

In its Economic Survey released on January 31, the finance ministry suggested setting up a bad bank that it said could be used to buy bad loans from the banks and deal with them through methods including conversion of debt to equity.

While the idea is not new, critics including former RBI Governor Raghuram Rajan have questioned the need for it at a time when more than a dozen already existing companies buying bad loans have yet to make a significant dent.

"I don't think a bad bank just by itself will necessarily work, I think it has to be designed right," Acharya, one of the four deputy governors in the RBI, said on Wednesday.

"The big piece of the problem is can you get the bank to sell the assets at the right price to (asset reconstruction companies) and private investors who want to come in ... I think that's going to be key," Acharya, a former New York University economics professor who joined the RBI last month, told a news conference after the central bank held rates.

"We're going to be thinking about what kind of design issues might help with that. But we think it is something designed properly could help."

One of the reasons cited for lower than expected bad loan purchases by asset reconstruction companies is the high price expectations by the banks, analysts say.

A slow legal process — India just last year enacted a bankruptcy law — is another factor that has been blamed for hindering the resolution of the bad loans.

Including "unrecognised" problem debts, total stressed loans in the system could be as high as $191 billion, or 16.6 per cent of the total loans as of September, the finance ministry has estimated. For the state-run banks, nearly 20 percent of the loans are stressed, it said in the Economic Survey.