Concerned about the bulging non-performing assets (NPA) situation, the government has decided to act fast to tackle the menace.
CNBC-TV18 learns that that public sector unit (PSU) banks have been asked to draw up a working paper, which could pave the way for them to dispose of a whopping 40-50 percent of their bad loans.
The paper is expected to be in place in a week.
Sources say that PSU banks are likely to propose an initiative, in which they will identify select bad assets on their books, ascertain a fair value for such assets using some price discovery mechanism and dispose them to an external institution.
Separately, CNBC-TV18 also learns that the government, at its level, is also taking a holistic view of the NPA situation and is actively considering several options, one of which could be spinning off assets to a sort of asset reconstruction company -- an idea discussed above.
The other option that the government is actively considering is creating a "bad bank".
A bad bank will buy up all bad assets of banks, a move that will cleanse the remaining banking system of the rot and will allow it to start afresh.
However, sources say that the Reserve Bank of India is opposed to the creation of a bad bank, an idea has been tried in the West in several countries, including the US following the subprime crisis.
The central bank believes that while the cost of creating a bad bank will be the same, or perhaps more, there are questions over how those assets will be valued, who will manage the bad bank and whether it would encourage moral hazard.
The Reserve Bank, it is learnt, believes that a bank has created the bad asset may have greater resolve -- or wherewithal -- to try and recover the loan, as opposed to an external institution on which such assets are foisted.
The government is already meeting officials from the IMF to understand the nuances of how a bad bank may work. Separately, the ARC option mentioned above is also on the table, while the NIIF is also said to be considering creating a stressed assets fund.
The final solution could be one or a hybrid of each of these options.
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