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The government has initiated a committee of bankers to look at a possibility of setting up a 'bad bank' and other new mechanisms to help resolve stressed assets faster.
After a brainstorming session with public sector bank chiefs, interim Finance Minister Piyush Goyal said, "A committee has been set up under the chairmanship of Sunil Mehta non executive chairman of PNB (Punjab National Bank) to deliberate whether it is worth considering setting up of an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) to deal with assets having exposure to several banks."
The bad bank idea is one of the most debated ones for stressed asset resolution suggested by many experts including Reserve Bank of India (RBI) Deputy Governor Viral Acharya and the government's Economic Survey.
A bad bank is an entity or structure that buys non-performing assets (NPAs) or distressed loans from banks and financial institutions (FIs), mostly at a discounted market price. It then works to recover and turnaround the assets through professional management, sale or restructuring.
In a speech in February 2017, Acharya had suggested two structures- a Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC).
In January 2017, the Economic Survey had suggested that a centralised Public Sector Asset Rehabilitation Agency (PARA) could be established.
However, Goyal said on June 8, "Whether an ARC is needed for faster resolution of stressed assets that many banks have and have caused losses of value for banks. The Mehta committee will also suggest modalities of the AMC or ARC...Such an entity could be set up if lenders feel it is required."
"If you move the stressed assets to a specialised entity, then you can allow banks to focus on regular business," said Rajnish Kumar, chairman of State Bank of India, who made a presentation during the meeting.
The AMC/ARC would allow banks to shift stressed assets out of their balance sheets, said PNB chairman Sunil Mehta. The funding structure of this entity would need to be worked out, Mehta added.
Banks are also planning to set up individual oversight committees to help clear resolution plans for individual accounts, Goyal noted. These board level committees could include external members to provide additional comfort to lenders.
This proposal comes against the background of surging bad loans with gross non performing assets (NPAs) across listed lenders climbing to over Rs 10.3 lakh crore, or 11.2 percent of advances, as of March 2018.
Further, Goyal said discussions were held on improving the credit flow to strengthen India's economy while mitigating risk flow associated with it.
"Banks have also decided to come together and start working in a more cohesive manner in taking faster decisions to resolve credit decision of MSMEs (micro, small and medium enterprises), exporters and other small and medium borrowers, so that the wheels of the economy, the growing needs of the exports can be addressed much faster."
The government and bankers also expect the Insolvency and Bankruptcy Code (IBC) to take care of indiscriminate lending by banks between 2008 and 2014.
Goyal said, "Banks have to see how much capital they can raise from sale of non core assets. And also factors money they get from resolution under IBC...it is too early to say if banks need more capital."
On the capital constraints faced by banks, the minister assured that the government is committed to support each of the PSU banks.
Given that almost four CEO positions are lying vacant, he said that the government will try and fill all vacancies in PSU banks in the next 30 days.
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