Bad bank needs to be empowered, capitalised to tackle NPAs: Vinod Rai

Rai said efforts had been made to carry forward the intermediate mechanism of an oversight committee, adding he had recommended more discretionary powers.

He said there had been talk of replicating the oversight committee experience across many committees. Given the huge chunk of bad loans, a single committee would not be able to do the job, he said further.

Rai added, however, that banks would only need to approach a single committee assigned to them. "If the government creates these bodies, resolution will happen in quick time," Rai said.

The government in its Economic Survey ending January had suggested the creation of a bad bank in the form of a public sector asset rehabilitation agency (PARA).

Gross NPAs of public sector banks increased to Rs 606,911 crore while total stressed assets (gross non-performing assets and restructured standard advances) of scheduled commercial banks were Rs 9.64 lakh crore as on December 31, 2016.

Finance Minister Arun Jaitley told CNBC-TV18 last week that a policy announcement on NPAs would be announced in a "couple of days".

Meanwhile, the annual banking Gyan Sangam has been deferred as the government wants to monitor the health of banks before planning a future roadmap. The meeting usually takes place in March but is now likely to be deferred to after the first quarter of the next financial year.

Below is the transcript of the interview

Q: Could you explain to us the resolutions that you suggested to the RBI and the government for resolving the non-performing asset (NPA) issues?

A: What I had written to the Finance Minister was not only on resolution, a meeting had been taken by the honourable Prime Minister in February some time where all the elements in government, we got together and discussed the banking setup as a whole. And some of the issues on which we needed to prepare a roadmap for ourselves with certain timelines, that is the issue on which I had written to the Honourable Finance Minister.

Q: So, where are they stuck right now?

A: That was roughly about a month back and I am very happy that from whatever news we are getting from the media and you also talked about it, the government seems to be taking a lot of very good steps in the direction of trying to resolve those problems.

Q: The Finance Minister has raised a lot of expectations with regards to some easy resolutions or quick resolutions to this whole banking mess. Some new instrument is what he spoke about at the CNBC event as well a few days back. Anything that probably you can shed light on? What sort of new instruments because the earlier instruments of Scheme for Sustainable Structuring of Stressed Assets (S4A) and other things have really not given that sort of returns or resolutions which a lot of the experts were hoping for.

A: We did experiment with the intermediate mechanism of the oversight committee and we have tried to carry that experiment forward and entrust the oversight committee with some more discretionary powers and that is what I had recommended. What exactly the steps the government is going to take, I am not privy to it, but there has been talk in replicating the oversight committee experience over many more committees and that will, be a very good move because there is a huge chunk bad loans or stressed assets which the banks carry on their balance sheet.

And if these have to be resolved, one oversight committee may not be sufficient. It will have to go to a few more committees. And I am pretty sanguine of the fact that if the government does create those bodies, it will see resolution in quick time.

Q: Are you hopeful given that historically in the past, if there are too many opinion makers or decision makers, it actually delays the whole process which actually led to a bit of further NPA stress. Too much of committees, do you think that is a solution to this mess?

A: No, it will not be too many committees that the banks will approach. It will be only many more committees because the flow of these bad loans is large, so if each bank or each joint lender's forum will have to approach only one committee. And if there are four committees and there are 100 cases, each committee will be handling 25 cases. But if one committee has to handle 100 cases, it becomes that much more difficult. That is why we are hoping that by this process, the resolution agenda will be taken forward in quick time.

Q: The one big thing which I want to ask you is your opinion on bad banks. It has been talked about a lot. Personally, what is your belief and is it a good move. If it indeed happens?

A: Bad banks have succeeded in lots of countries where we have studied there, maybe in Spain, maybe in Indonesia, wherever it is. But once you create a bad bank, you have to empower it. You have to capitalise it properly. You have to give it a huge amount of discretion. So whether it is in the private sector or in the public sector, it will have to be peopled with persons who have got the professional skills. So, that government must ensure before we create all that.

The other issue is who are the people who are going to be actually managing these assets? Do they have the skill sets and then, if possible they are going to be people to whom it will be transferred. The valuation becomes a key factor in each of these. And on that, a huge amount of discretion will be required. Probably if the bank is created, it will have to be at an arm's length distance where professionals manage it and professionals ensure that the valuation is done along the guidelines that bad banks normally function.

Q: You spoke about bad bank concept being there in many countries. Given the India situation and you are so hands-on currently on what the entire mess on the banking system is, is bad bank a good idea for India or one should not venture into this?

A: India already had about 18 asset reconstruction companies and I have watched them over the last 14-15 years. Some of them have come up only recently. Now, one problem that they face is that the amount of stressed assets that they have been able to resolve in the last 15 years is very limited.

So, that factor will have to be taken into account before we decide on the creation of the bad bank and that is the issue on which I would like to concentrate a lot before we take a firm decision that the bad bank must be created. Because once the assets are hived off, maybe it has become business as usual to the banks, but once the assets are hived off, it is a huge amount of debt that the banks carry. And that must be resolved to the satisfaction of the economy or the country. It should not be allowed to just deteriorate in terms of asset value over there.