Letter to BS: Bad bank a good idea but IBA might not be the right sponsor

The bank may ideally be floated by the government with it holding a 26% stake and the rest with some large banks

This refers to “Govt may leave it to IBA to set up bad bank” (July 8). The idea to create a bank exclusively to manage stressed assets of banks is welcome but the Indian Banks’ Association (IBA) might not be the right sponsor. First, the IBA is only an association of banks and not a corporate entity. It is optional for banks to be a member of IBA that has more of an advisory role.

Even assuming that this handicap is taken care of through changes in its constitution, the administration of such a strategically important bank is not feasible without the government’s and the Reserve Bank of India’s participation as regulatory and legal amendments might be required as the bank moves on. For instance, the stamp duty on the transfer of security and assignment of debts needs rationalisation across states.

The bad bank should not be a mere asset reconstruction company and should have all-round expertise in areas such as valuation of assets, rehabilitation ideas, legal formalities etc and should engage experts including insolvency professionals. Further, infusion of funds may be required going forward and all these would be easy only if there is government participation. Hence the bank may ideally be floated by the government with it holding a 26 per cent stake and the rest with some large banks.

M Raghuraman  Mumbai

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