Nirmala Sitharaman who is the Union Finance Minister in her Budget 2021 speech on 1st February declared an entity in the form of an asset reconstruction company/asset management company or more merely known as a ‘Bad Bank’ to assist the banking system in getting rid of the existing stock of problematic loans. The bad bank will absorb the existing stock of non-performing assets (NPAs) of the banks and shall try for resolution through a professional approach.
The aspiration is that a government-supported bad bank can give crisis-ridden Indian lenders some breathing place in the fight against NPAs.
The concept of Asset Reconstruction Companies (ARCs) has been around for several years in India. As the name states, ARCs are in the business of getting assets and attempt to reconstruct these assets over a period to search for potential buyers.
Among the several other entities operating in India in the asset reconstruction space, the oldest is Asset Reconstruction Company India (ARCIL). In fact, ARCIL is even owned by a clutch of financial institutions which includes State Bank of India (SBI), IDBI Bank, ICICI Bank (ICICI), Punjab National Bank (PNB), and Avenue India Resurgence Pte.
Indian banks are sitting on Gross NPAs of nearly 8%. A substantial chunk of huge NPAs on the books of Indian banks are not resolved for many years. The FM’s announcement came when banks are certain to see an increase in NPAs in the wake of COVID-19. The RBI has projected the GNPAs to grow to nearly 15% by September of this year in a worst-case scenario. Going by the available information till now, the proposed bad bank too shall be an entity owned by several banks, and the government shall not fund the project or take any sort of ownership in the entity.
Likely, the transactions made between the PSBs, and the bad bank shall be done at a lower cost as the net value of assets are certainly lower now as banks have done crucial provisions on these accounts. These forbearances are certainly to give a leg up to the bad bank.
The only flipside to this proposal is that the starting capital burden shall be on the banks, mainly PSBs. The government has certainly indicated that it would not give any money to the entity which solely passes the ball to PSBs. These banks are already hit badly by bad loans. The Rs 20,000 crore capital infusion declared in 2021 has fallen short of expectations. In the absence of private investments and government support, the PSBs shall now have to primarily take the burden.