Empower bank boards, set up SPV to contain bad loans: Industry

To contain non-performing assets of banks, the government should empower the boards of public sector banks to deal with bad assets with the help of a special purpose vehicle which can lay broad guidelines for the lenders to take "haircuts", an industry body said.

The twin exercise of empowering the boards of the PSU banks and formation of an SPV, which may be called 'Asset Revival Bank' (ARB) should be implemented without further delays, instilling confidence in the bankers to take decisions about restructuring the loans to sectors such as steel, construction, power etc, Assocham said.

While the SPV would set the rules of the game, the boards of banks should be given powers to decide on the quantum of the waiver of compounding of interests, it said.

"The new institution has been tried in China which has been managing the problem at a much higher scale," Assocham Secretary General D S Rawat said.

He said the ARB should be structured in a manner so it can be kept outside the purview of the 3Cs -- CAG, Central Vigilance Commission and CBI -- which, can, otherwise, created, or have rather already created enough fears among professional bankers not to take even routine decisions of sanctioning fresh loans.

"So far as taking a call on the NPAs or writing them off or cleaning the balance sheets are concerned, these have become a clear no-no because of the fear of being hounded even after retirement," it said.

The chamber said in a growing economy where the total loan portfolio or the book size of the banks needs to grow, writing off Rs 12,000-14,000 crore bad loan a year should not raise eye-brows and be treated as part of a normal business risks.

"This is surely not to suggest to let go wilful defaulters or fraudsters, though much more clarity is needed as to who qualifies to be a wilful defaulter", it said.

This is essentially what China did when its government-owned banks were saddled with some USD 400 billion in bad debt during the 2000s.

On account of fear or reprisals, the banks are not prepared to support any company declared NPA. NPAs are untouchables and banks are eager to get rid of them.

It is very important that RBI quickly provides a suitable mechanism to revive the industry by incentivizing the Banks to deal with the NPAs in an effective manner.