A Bad Bank Alone May Not Be Enough To Tackle India’s Bad Loans, Says Fitch
Indian banks need a bank recapitalisation programme along with a bad bank, says Fitch.
A ‘bad bank’ may go a long way in resolving the Indian financial sector’s stressed situation, but it alone can’t solve the problem for banks, says international ratings agency Fitch in a report titled, Bad Bank May Push India Loan Clean-up; Leaves Capital Gap.
The ratings agency cites the 2016-17 economic survey which estimates that 57 percent of the top 100 stressed loans will need a debt reduction of at least 75 percent to make them viable. This in turn means that the banking sector needs to have adequate capital to absorb this ‘haircut’, says Fitch.
There are logistical hurdles to the formation of a bad bank as well, according to the ratings agency, which outlines the need for a well-designed mechanism for pricing bad loans, “particularly if the intention is for the bad bank to be run along commercial lines and involve private investors.”
Several private asset reconstruction companies (ARCs) are already operating in the country, but only a small proportion of the bad loans have been taken over by them in the last two years, the report read.
Banks have been reluctant to offer haircuts on bad loans even where they are clearly worth much less than their book value. This is, in part, because haircuts invite the attention of anti-corruption agencies, making bank officials reluctant to sign off on them. Reduced valuations also increase pressure on capital.Fitch Ratings Report
Citing the need for a “credible recapitalisation programme”, the ratings agency estimates that the banking sector will require “around $90 billion in new capital by financial year 2018-19, to meet Basel III standards and ongoing business needs.”
The estimated capital requirement is unlikely to fall, even with the introduction of a bad bank. The figure, instead, could rise if lenders are forced to “crystallise more losses from stressed assets than we currently expect,” reads the report. Even the government will eventually have to inject more than the $10.4 billion assigned to public sector banks in the Union Budget 2017, it adds.
The idea of a bad bank has been gaining traction after Arvind Subramanian, chief economic adviser to the government, proposed the formation of a Public Sector Asset Rehabilitation Agency (PARA) in this year’s Economic Survey. Non-performing assets were termed as a "challenge to the economy", given that just 50 corporates account for 30 percent of banks' stressed assets, in the survey.
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
The newest member of the Monetary Policy Committee and Reserve Bank of India (RBI) Deputy Governor Viral Acharya, had also acknowledged the need to find fresh solutions to resolve the stressed assets situation in India on Tuesday.