“A bad bank is a good idea”
A bad bank could be India’s best move to recover stranded assets and boost credit growth in the aftermath of covid-19, experts told mintMonday’s Road to Recovery webinar.
The panelists highlighted the success story of the sovereign bank, Danaharta, created by the Malaysian government to clean up bad loans after reaching unsustainable levels. India, experts said, could learn a lesson or two from the move and create a bad bank with its own set of regulations so bankers can spend more time on the flow of credit instead of just trying to recover. bad debts inherited.
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Anant Narayan, Associate Professor, SP Jain Institute of Management and Research, said the goal is not only the survival of the financial services ecosystem, but to ensure that it can fund the huge aspirations and the India’s growth potential. “It’s not just that non-performing assets could reach 14.8% (RBI projections), also remember that many NPAs have been written off in the past five years. These do not appear as raw NPAs, but are pending recovery, ”Narayan said.
Banks written off loans worth ??$ 2.37 trillion in FY20 and, as RBI said in its annual report Banking Sector Trends and Progress in India 2019-20 report, the improvement in the quality of assets was led by write-offs.
“I still think there is room for a bad bank and the experience that I particularly like is that of Malaysia in the aftermath of the Asian financial crisis. They created a bad government sponsored bank and bought bad loans at what they saw as the market price on the banks’ books, ”Narayan said.
Likewise, the United States launched the Troubled Asset Relief Program (TARP) following the Lehman crisis in 2008. “Vietnam also faced a similar problem of bad banks. They chose another solution. He asked public and private banks to shift their bad loans to the new structure against a bond and, after five years, to write off bad debts to ensure they could still maintain a good capital adequacy ratio. clean, ”said Aymar de Liedekerke Beaufort, CEO of BNP. Paribas India.
Beaufort said there were many lessons India could learn from other markets like Europe, where several banks exist because the mergers did not take place. “There is room for public banks. India needs strong banks. The debate should be about what type of banks and how many banks India needs, ”Beaufort added.
Last year, the government merged 10 public sector banks into four, creating larger entities: the Punjab National Bank took over Oriental Bank of Commerce and United Bank of India; Syndicate Bank merged with Canara Bank; Union Bank of India absorbed Andhra Bank and Corporation Bank; and Indian Bank merged with Allahabad Bank.
However, some of the panelists were of the view that in the past India’s bad debt problems could not be solved by setting up a bad bank. Ashish Chauhan, managing director of BSE Ltd, said India’s financial system has been facing bad debt problems for 30 years, but the Industrial Reconstruction Bank of India (IRBI), set up to deal with sick industrial units, had failed. were put aside in a bank and nothing came of it, “he added.
However, Narayan said the problem with the previous bad bank was that the assets were transferred at their book value, which essentially moved them from one mat to another.
Roopa Kudva, Managing Director of Omidyar Network India, said the key issue in India’s banking system is governance.
“If the boards of banks can be freed up to become truly independent, and I’m talking about public sector banks as well, that would be a huge step forward,” Kudva said.
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