An employee, holding an umbrella to shade him from the sun, supervises dumping at the Municipal Corporation of Delhi’s landfill site on the outskirts of New Delhi. (Photographer: Sanjit Das/Bloomberg News)

Has The ‘Bad Bank’ Idea Made A Comeback?

The government has set up a committee of bankers to look into new mechanisms that may help resolve the problem of stressed assets faster. Among the options up for discussion is a structure resembling a ‘bad bank’, which has been debated for many years now.

A committee headed by Punjab National Bank chairman Sunil Mehta will come up with recommendations to set up an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) for faster resolution of stressed assets, interim Finance Minister Piyush Goyal told reporters after a meeting with top public sector bankers in Mumbai. Such an entity could be set up if lenders feel it is required, Goyal said.

The idea of taking stressed assets off the books of banks and parking them in a specialised entity has been discussed in various forms in the past.

In January 2017, the Economic Survey had suggested that a centralised Public Sector Asset Rehabilitation Agency (PARA) could be established.

In a speech in February 2017, Reserve Bank of India Deputy Governor Viral Acharya had suggested two structures – a Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC). The former could be set up with equity participation from banks and global funds and would invest in sectors where there is economic viability in the short term. The latter could be set up with some form of government support and look at stressed assets in sectors which are facing short term stress but are of long-term economic value.

Bankers are not opposed to the idea.

If you move the stressed assets to a specialised entity, then you can allow banks to focus on regular business, said Rajnish Kumar, chairman of State Bank of India. The AMC/ARC would allow banks to shift stressed assets out of their balance sheets, said PNB Chairman Sunil Mehta. The funding structure of this entity would need to be worked out, Mehta added.

The attempt to come up with a new stressed asset resolution mechanism comes against the background of a continuing surge in bad loans. Gross non-performing assets across listed lenders rose to Rs 10.3 lakh crore, or 11.2 percent of advances, as of March 2018, said a Crisil report released earlier this week.

While recognition of stressed assets has accelerated, resolution remains slow. A number of large stressed accounts are being resolved under the Insolvency and Bankruptcy Code. Assets in certain sectors like steel have attracted investors but those in sectors like power have seen limited interest.

Commenting on stressed assets in the power sector, Goyal said the finance ministry will work with the power ministry to come up with a solution. Earlier this week, BloombergQuint reported that three options were being considered to help stressed power projects.

Oversight Committees

Banks are also planning to set up individual oversight committees to help clear resolution plans for individual accounts, Goyal said. These board level committees could include external members as well, to provide additional comfort to lenders.

Bankers have been reluctant to make decisions on resolution plans, particularly those that include large haircuts. They fear that these commercial decisions could later be questioned by vigilance agencies.

A number of bankers are being investigated in relation to loan accounts which have gone bad or where fraud has been detected. Most recently, serving and retired IDBI Bank officials were booked in a case related to telecom firm Aircel.

At present, there are industry-wide oversight committees intended to look at resolution plans in the case of large consortium banks. These committees set up by the RBI were intended to sign off on restructuring plans for large stressed accounts.

The new plan focuses on setting up oversight committees within individual banks.

Consolidation On The Agenda?

Goyal did not comment on reports of consolidation within public sector banks. However, the SBI chairman made a presentation to the minister and other bankers on the bank’s experience with consolidation. In 2017, SBI merged its associate banks and Bharatiya Mahila Bank with itself.

Bankers who attended the meeting said that consolidation may be a good idea. Banks have been asked to discuss options among themselves and submit a plan to the finance ministry, they said.

However, according to a senior banking industry official, a serious effort towards consolidation is unlikely before the 2019 general elections.

Dealing With Weaker Banks

For now, the focus remains on ensuring that credit flow to the economy and, in particular, small medium enterprises does not suffer. A high level of stressed assets on public sector bank books have meant that these lenders have slowed fresh sanctions of credit.

Total outstanding loans of public sector banks accounted for 64 percent of all loans across scheduled commercial banks as of March 2018, shows data compiled by BloombergQuint. This is 4 percentage points lower than the 68 percent share of loans held by these banks at the end of March 2017.

Banks have to come together in a cohesive way to ensure credit flow to MSMEs, exporters and other small and medium borrowers, said Goyal. He added that in the case of borrowers of banks which have been put under ‘prompt corrective action’ by the RBI, other banks could step in to meet their lending requirements.

Currently, 11 government banks are under the RBI’s corrective action framework. Among these, Dena Bank has been told to stop lending. Allahabad Bank has been asked not to expand its risk-weighted assets, which suggests that the lender can do very little fresh lending.

The stress on bank balance sheets has also meant that public sector banks have reduced participation in the bond markets, leading to weak demand for government securities. This is an issue for banks to resolve and the government will not interfere, Goyal said.

Vacancies At The Top

A handful of government banks are also awaiting top level appointments.

At least four government banks do not have chief executive officers, Bloomberg News reported earlier this week. These vacancies would be filled in 30 days, Goyal assured. The Banks Board Bureau is drawing up a list of candidates, he said.