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Budget 2021: Bad banks plan back on table to tackle NPAs

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New Delhi: Ahead of the budget, the government is again considering the idea of bad banks amid concerns that nonperforming loans may spike as Covid-19 assistance to businesses comes to an end. The finance ministry has reached out to banks and other stakeholders to seek their views on the likely framework, people aware of deliberations told ET. A bad bank is an entity that purchases nonperforming assets (NPAs) from banks at market price, clearing the balance sheet of lenders and improving their fundraising capabilities.

Many Models

“Discussions are on — pros and cons are being examined,” said one of the persons. Several models, including an entity-based one, are being considered. In such a model, instead of one big bad bank for all state-run lenders, for instance, multiple ones could be set up, each acquiring the NPAs of the entity it supports. A final call will be taken closer to the February 1 budget, said the first person cited above. Industry is said to be in favour of multiple bad banks.

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A spike in bad loans will force banks to set aside capital toward provisioning while denting their earnings and ability to lend. The government does not want credit flow impaired in any way when the economy is in recovery.

There have been reservations within the government as also the central bank on the idea of a bad bank. A section within the government is sceptical about whether a new structure like a bad bank will make much difference, especially given the haircuts that will be involved.

The government has set aside ₹20,000 crore for capital infusion in banks in the current fiscal.

In its annual Report on Trend and Progress of Banking in India released last month, the Reserve Bank of India (RBI) had warned: “Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward.”

A rise in bad loans is inevitable when the Covid-19 NPA standstill relief provided to businesses ends. The issue is currently before the Supreme Court. The RBI estimates gross NPA ratios would have been higher, in the range of 0.10-0.66%, at the end of September, if there was no standstill. State-run banks’ gross NPA ratio of 11.3% in March 2020 may increase to 15.2% by March 2021 under the baseline scenario, according to the RBI’s Financial Stability Report of July 2020.

The idea of a bad bank has been discussed in the past. The Economic Survey for 2016-17 had suggested a Public Sector Asset Rehabilitation Agency, noting that private sector asset reconstruction companies had not been successful in resolving bad debts.

The Indian Banks’ Association had backed the idea earlier in the fiscal year.

More recently, economic affairs secretary Tarun Bajaj had said that the government was exploring all options, including a bad bank to improve the health of the banking sector in the country.

The Confederation of Indian Industry has pitched for multiple bad banks in the wake of rising NPAs as part of its pre-budget wish list. “In the aftermath of Covid, it is important to find a resolution mechanism through a market-determined price discovery,” CII had said on December 19. “With huge liquidity both globally and domestically, multiple bad banks can address this issue in a transparent manner and get the credit cycle back in action.”

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