Indian lenders want the government to provide up to $2 billion to set up a "bad bank" at a time when their heavy pile of soured debt is expected to double in size due to the COVID-19 pandemic, according to two sources with knowledge of the matter.
The banks have proposed that the government set up an asset reconstruction company (ARC) to initially buy non-performing loans worth up to a total of 1 trillion rupees ($13.3 billion), the banking industry sources told Reuters.
The Indian Banks' Association (IBA) has drafted the proposal and sent it to the government and the Reserve Bank of India for their approval, according to the two bankers plus a third banking industry source. They asked not to be named as the discussions are confidential.
"The government needs to put in anywhere between 100 billion rupees to 150 billion rupees ($1.3 billion-$2 billion) to form the ARC where the bad loans can be transferred," said the first source.
The IBA, finance ministry and central bank did not immediately respond to requests for comment.
Indian banks are already grappling with a bad debt pile of 9.35 trillion Indian rupees, equivalent to about 9.1% of their total assets, as of Sept. 30 last year.
The government and bankers are worried that the share of bad loans may double with the economy grinding to a halt during the nationwide lockdown.
The ARC, likely to be named National Asset Reconstruction Company Ltd, will be set up for an initial period of 10 years, two of the sources said. A non-performing loan must be worth at least 5 billion rupees to qualify to be bought, they added.
The ARC would pay the lenders at least 15% of the present net value of the loans it buys in cash, while the remaining would be paid in the form of security receipts, the two sources said.
The receipts can be redeemed by the banks once the account has been settled or sold to other investors in the secondary market, the people added.
Additionally, a separate asset management company and an alternate investment fund would also be created in which banks and other private companies could participate by managing the stressed assets to secure better valuations, the sources added.
"The initial discussions have been encouraging but the plan will succeed only with the government's blessings," said the first source.