Senior bankers float ideas to shape ‘bad bank’

Financial Express
June 11, 2018

With the finance ministry having formed a panel to explore the feasibility of a ‘bad bank’ to clear the dud asset mess, senior public-sector bankers are preparing to pitch in with ideas for likely discussions with the committee to help shape such an ecosystem. A senior banker with a Delhi-based lender said India might take a cue from the Chinese system where asset management companies (AMCs), set up with initial equity capital injection by the government, take over stressed assets of state-run banks attached to them and dispose them of in ten years after turning them around.
“We can have at least two AMCs (China has four) and the government may distribute PSBs among these two for taking over bad assets,” he said. One such model, indicated in a thesis on the management of asset quality submitted to a Rajasthan University by Fareed Ahmed, moots two banks/funds to take over stressed assets of public-sector banks (PSBs) and work them out, without any cost to the exchequer. Ahmed is currently the executive director of Punjab and Sind Bank.
Last week, interim finance minister Piyush Goyal set up the panel headed by Punjab National Bank non-executive chairman Sunil Mehta to suggest whether to set up an ARC or an AMC for faster resolution of stressed assets. The panel will submit recommendations in two weeks. In the Economic Survey of 2016-17, chief economic advisor Arvind Subramanian had favoured a centralised Public-sector Asset Rehabilitation Agency (PARA) to purchase stressed loans, especially the large ones, to turn them around.
In his thesis, Ahmed said the government may consider setting up two banks—Samrakshana Bank (Protective Bank) and Prarakshalana Bank (Cleansing Bank) — with nominal capital. These banks should be exempted from maintaining any regulatory capital. Bad loans can be transferred to them, based on outstanding amount beyond a limit, leaving only a tiny portion of non-performing assets (NPAs) with banks. They can transfer the NPAs having economic value to the Protective Bank with a 30-40% haircut, and the rest to the Cleansing Bank. Security receipts can be issued by the acquiring bank in lieu of the 60-70% value of the viable bad assets for five years.
However, in such cases, the selling bank may be advised to set aside 20% of the original outstanding amount annually until the NPAs are fully provided for. The Protective Bank can make efforts to revive the assets, including resolution through insolvency proceedings. If a particular asset or industry shows sign of revival, it may be continued in the books, as it can yield income for banks.
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