RBI On Bad Bank: Open To All Options
Bad bank on the cards? RBI deputy governor says its among options that must be considered
The Reserve Bank of India (RBI) will need to remain open to all solutions to resolve the problem of bad loans in the banking sector, including the idea of setting up of a bad bank, said Viral Acharya, the newly appointed deputy governor at the Reserve Bank of India (RBI).
Acharya’s comments come after a suggestion in the Economic Survey to set up a public sector asset reconstruction company. The Survey had proposed a centralised Public Sector Asset Rehabilitation Agency (PARA). When asked whether the RBI would support this, Acharya, who has written extensively on the health of public sector banks, said that all ideas should be considered.
I think we have to remain open to all solutions at this point, because I think the problem is quite large. I don’t think a bad bank just by itself will necessarily work. I think it has to be designed right. The big piece of the problem is - can you get banks to sell the assets at the right price to ARCs and private investors who want to come in? How to get that right price to come in using a portfolio or a bad bank kind of approach? I think that’s going to be key. We’re going to be thinking about what kind of design issues might help with that. We think that if designed right it is something that could help.Viral Acharya, Deputy Governor, Reserve Bank of India
NS Vishwanathan, another deputy governor at the central bank had a similar view and said that “all options are open.” He added that the fundamental question is about structuring any proposed bad bank correctly.
“We’ll have to take a call. There’s no dogmatic view either way,” said NS Vishwanathan
The views expressed by Acharya and Vishwanathan are in contrast to the RBI’s views under former governor Raghuram Rajan. Rajan had opposed the idea of a public sector asset reconstruction agency and had suggested that the resolution of bad loans be left to private sector asset reconstruction companies (ARCs). To strengthen the ARCs, the government and the RBI had changed rules, allowing a sponsor to hold 100 percent in the ARC. The foreign investment limit had also been raised.
Sales of bad loans to ARCs however have remained slow. One reason for this is that the RBI has asked banks to provision against any security receipts (SRs) they receive in return for a bad loan. At present an ARC has to give a minimum 15 percent in cash while buying a bad loan and the rest in SRs. However, since banks now have to provision against these SRs as well, there is little incentive to sell bad loans and banks are trying to resolve them internally.
It is unclear whether the RBI would be willing to undertake the significant change in rules needed to set up a bad bank like structure and allow it to succeed.
Acharya, on his part, seems to believe a bad bank is an option and has spoken in favor of the idea in the past.
In an interview with BloombergQuint before he took charge as deputy governor of the central bank, Acharya said, “I am absolutely proposing, either explicitly or implicitly, that we separate the unhealthy parts of the troubled banks from the healthy parts.”
Bad loans on the books of Indian banks surged after the asset quality review conducted by the RBI in the second half of 2015, which required banks to classify stressed assets appropriately. According to the Economic Survey, gross non performing assets climbed to almost 12 percent of gross advances for government-owned banks at the end of September 2016.
