Dinesh Khara, the chairman of India’s largest lender State Bank, said today that the proposed Bad Bank had received all necessary approvals to start operations. Public sector banks will have a majority stake in the National Asset Reconstruction Company Limited (NARCL) and private banks will have a significant stake in India Debt Resolution Company Limited (IDRCL), Khara said.
A bad bank is an entity that absorbs the bad assets of banks, enabling them to clean up their books. Union Finance Minister Nirmala Sitharaman had announced in the last union budget the formation of Bad Bank. The Ministry of Finance conceptualised Bad Bank with the objective of absorbing bad assets from public sector banks for a clean-up of the lenders’ balance sheets.
Banks are weighed down by huge amounts of bad loans, or loans on which no interest or principal has been paid for over 90 days.
In the initial phase, around 15 cases worth Rs 50,000 crore will be transferred to Bad Bank in this fiscal, Khara said. An estimated Rs 2 lakh crore worth bad assets is planned to transfer to the Bad Bank. “There were certain concerns being raised but eventually both entities have requisite approval,” Khara said. A total of 38 accounts with Rs 83,000 crore outstanding in total have been identified for transfer so far but some of these accounts have been resolved already, Khara said.
In accordance with the operational structure, the NARCL will acquire and aggregate identified NPA accounts from banks and IDRCL will handle the debt resolution process. “This unique public-private partnership will bring benefit of aggregation, expertise to resolve stressed assets,” said Khara, adding he expects faster asset resolution to take place in the banking sector with the establishment of Bad Bank.
Khara said while the initial estimate was Rs 2 lakh crore worth of assets will be transferred to the bad bank, some of the large cases were resolved sub subsequently.
Stress tests have revealed that banks’ gross non-performing assets (GNPAs) may jump from 6.9% of assets in September 2021 to 8.1% by September 2022 under a baseline scenario and to 9.5% under a severe stress scenario, the Reserve Bank of India (RBI) said in its Financial Stability Report on 29 December.
If the current wave of Covid-19 led by the Omicron variant drags on, the figure could escalate. According to the plan, banks will receive 15% of the value of assets being transferred upfront in cash; 85% will be given as security receipts (SRs). If the debt resolution doesn’t happen within a five-year period, the government will have to pay banks against the SRs if the guarantee is invoked.
Khara said he expected resolutions to happen faster with NARCL in place.
The launch of Bad Bank is crucial for the banking sector if it leads to faster bad assets resolution. Banks need to set aside more money to cover bad loans known as provisions in banking industry jargon. The higher the provisions, the bigger is the pain felt by the bank. Its profitability takes a hit subsequently. The bank will require more capital to plug the bad loan hole.
A stockpile of bad loans on its balance sheet impairs the ability of a bank to extend fresh loans. When credit growth slows, as was the case to industries over the last few years, the economy suffers. The economic slowdown and consequent job losses further affect the ability of companies and individuals to repay bank loans.