Idea Of Bad Bank Gaining Traction In India: Arvind Subramanian
India needs to create a bad bank quickly, says Arvind Subramanian.
The idea of setting up a state-owned asset reconstruction company (ARC) or bad bank to deal with mounting NPAs is gaining traction and it needs to be created quickly, India’s Chief Economic Adviser Arvind Subramanian said on Wednesday.
Essentially, there seems to be a growing convergence towards the idea (of a state-backed asset reconstruction company). The broad idea that we should do something like this is gaining traction.Arvind Subramanian, Chief Economic Adviser
Newly-appointed RBI Deputy Governor Viral Acharya on Tuesday suggested a two-pronged strategy to resolve the issue of bad loans including creation of a Private Asset Management Company. For larger stressed assets of power companies, loans need to be bought by the government-owned asset management company, he had suggested.
Making a case for a state-owned ARC, Subramanian said, "You were already on the hook (with bad loans) so not that a bad bank is going to cost you more. Second, RBI has already tried so many things, including private ARCs, where is the solution?" Various proposals are being brought to the forefront, he said, adding, "there is a need to get that (bad bank) thing quickly".
Terming mounting non-performing assets (NPAs) as a challenge to the economy, he said "there is no one thing that you can do immediately. It's a very complicated problem. It’s not something you can just throw money at."
The government is looking at it very closely, he said, adding, "I think the more you delay the problem the more private investment will remain weak. That's I think the big cost we face now. And of course, the losses to the government keep mounting. Because you delay, the value of the asset declines and the amount of debt goes up." He also said finding resources for NPA resolution is not an issue but requires political cover to write down debt.
"My view is that finding the resources finally will be less of a problem than doing other things like politics, the writing down of debt and all that. So finding those resources, I don't think, is really an issue. I don't think it's the stumbling obstacle to solving that," he said.
"Banks have to write off these debts. Which middle-level manager has the gumption or the courage in this environment to do that? Decision on that are profoundly political," he wondered.
As on September 30, 2016 gross NPAs of public sector banks rose to Rs 6.3 lakh crore as against Rs 5.5 lakh crore at the end of the June quarter. This works out to an increase of Rs 79,977 crore on a quarter-on-quarter basis.
‘Highest Priority’ To Bad Loan Resolution
Stressing that the government has accorded the highest priority to NPA resolution, Subramanian said, "There is a sense that it's costing us a lot. Private investment growth has been negative. So we need to bring that back to some healthy level that was before all this happened."
RBI has, over the past few years, introduced a number of mechanisms to deal with the stressed asset problem, he said.
Initially, the schemes focused on rescheduling amortisations to give firms more time to repay. But as it became apparent that the financial position of the stressed firms was deteriorating, the RBI deployed mechanisms to deal with solvency issues, as well.
Slamming rating agencies for not upgrading India's sovereign rating, he said government does whatever is in the best interest of the country and not exclusively from rating perspective.
Governments have to act based on their assessment of what is a good policy, the best policy for them. The government cannot base their policies exclusively on what rating agencies are going to say. This is the kind of thing that have got many countries into trouble.Arvind Subramanian, Chief Economic Adviser
"I think we have to assess what is best for us. I am not saying we should ignore them. They are one small and modest piece in the puzzle," he added.