Government should consider formation of bad bank to deal with stressed assets: Asian Bankers Association chairman

India’s Insolvency and Bankruptcy Code is not the only way to deal with stressed borrowers and the government should look at other options, including the formation of a bad bank, Asian Bankers Association Chairman Daniel Wu said.

Wu was also doubtful about the effectiveness of the Rs 2.11 lakh crore recapitalisation plan announced by the government for state-owned banks.

“IBC is not the only solution to the bad loan problem – many countries prior to India have encountered the same problems,” Wu said on the sidelines of the 34th ABA General Meeting and Conference hosted by State Bank of India on Thursday.

“Some countries have separated the bad loans from the good loans because you put all the bad loans into an asset management company and let people only focus on that. When we deal with our bad loans, we just cut it off. I need to make more money instead of dealing with collection or approaching courts to recover the money. It’s not worthwhile,” said Wu, who is also CEO of CTBC Financial Holding Co., one of Taiwan’s largest banks.

The IBC introduced last year has been touted as the panacea for all ills related to the Rs 8.4 lakh crore bad loan mess. So far, banks have been forced to give up part of their claims, without any resolution or recoveries coming their way.

Wu said infusing more capital in state-run banks may not be the best idea to deal with stressed assets.

“I understand that the government may want to inject more capital in these banks, but from my personal experience, that is going to be ineffective,” he said. “If you inject a dollar, probably 50 cents will go towards the right part, but if you cut the loan off, it’s the best way. So you make all these good banks and move on to making more money.”

The government announced a Rs 2.11 lakh crore plan to recapitalise banks on October 24. Of this amount, Rs 1.35 lakh crore will be via recapitalisation bonds and the remaining Rs 76,000 crore will be from budgetary support and market fund raising. The government is yet to decide how this capital will be distributed among healthy and ailing state-run banks.