Why Budget proposal for setting up of a bad bank is a good idea

Mumbai: Bankers and distressed asset managers have welcomed the move to set up a bad bank for toxic loans. Although no details are available on the amount of capital the government plans to allocate, bankers said the move was a step in the right direction, potentially helping resolve bad loans quickly. “It will expedite the resolution of bad assets.

Taking over the bad loans reduces the provisioning requirements and enhances the ability of the banks to lend to the productive sectors of the economy to spur growth,” said Rajkiran Rai, chairman of Indian Banks’ Association (IBA) and CEO of Union Bank of India.

The IBA and companies have been suggesting the creation of a bad bank for a long time. These calls gained momentum due to the Covid-induced disruptions that have spawned more bad loans.

Finance minister Nirmala Sitharaman said an asset reconstruction company (ARC) will be set up to consolidate and take over the existing stressed debt from banks to sell them to alternative investment funds (AIFs) and other potential investors later.

At a post-budget press conference, Sitharaman said the government plans to set up a holding company to which banks can transfer their stressed loans, which can be sold at a market determined price later.

“In Covid parlance, this is like setting up a jumbo quarantine centre for NPAs. However, for treatment it will require a large number of ventilators, which effectively are distressed debt funds with risk appetite to acquire these NPAs. Vaccine, or permanent cure, of course, lies in enhancing underwriting skills, and oversight mechanism to arrest deterioration of credit quality,” said Hari Hara Mishra, director at UV ARC.