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Why Bad Bank Idea Is Not That Bad?

In one of our last article on bad banks, we had questioned the feasibility of bad bank in India and whether it can be as effective as it had been with Citi/ Bank of America or other global banks (e.g. Sweden & so on). But there is a counter view which throws up a few interesting point in support of bad banks efficacy in Indian scenario.

Let’s look at some stats:

  1. “As of June 30, 2016, SBI’s top 100 wilful defaulters owed it more than 60 percent of its total money worth Rs.13,167 crore”: DNA report
  2. “All stressed assets to the extent possible, where we had common exposures, are aligned. ” SBI Chairman on merger with associate banks
  3. RBI had informed that gross outstanding credit for top ten corporate groups is Rs 5,73,682 crore as on March 2016″- TOI article

These snippets gives a view that there is a significant commonality/ overlap in the list of large defaulters from corporate across different banks. Applying the 80:20 rule, that 20% of corporates are probably responsible for 80% of NPA by value in corporate sector, then a bad bank will help in synergizing the effort towards recovery from these companies. Instead of a distributed effort by each & every bank, a bad bank focused synchronized approach can build up a lot of pressure on these defaulters (including the large willful ones as well).

Secondly bad bank is like a ‘project’ / ‘mission’ with clear objective and defined timelines. It is not supposed to start an alternate banking model, but act as a special purpose vehicle to address the NPA issue. For every bank, tackling NPA is one of the objective (and it creates problem for them to focus on other key banking functions), while for ‘bad bank’ it is ‘the objective’. The bank closes down as soon as its proceedings are over and objective met (e.g. Citi bad bank closed down recently after it was very successful in addressing the toxic assets)

Thirdly, it may be difficult to change law/ provide additional power for recovery/ asset sale etc to each & every bank, it is easier to have this one ‘bad bank’ institution empowered with sufficient teeth to take the NPA head on.

Fourth, the willful defaulter cases also probably points to some kind of nexus between banks, politics & organizations. which may be difficult now to counter from within. A separate institution with no hangovers, can surely act with much more conviction & clarity. For this, surely though, GOI & RBI needs to give ‘bad bank’ sufficient power and allow it to work independently without any intervention.

Recently FT reported of a case of a Chinese ‘bad bank’/ simply ‘asset management companies (AMC)’ making a windfall profit from alternate lending. They raise money with low interest from market and then lend it to corporates, who no bank would touch probably, at a high rate (premium for restructuring existing loans etc). The interest margin from this alternate lending has given them the profit. Chances of that happening in India remains to be seen as regulations are yet to be formalized for such a P2P alternate lending market. Additionally creating an additional financial layer/ facilitator is not the key objective/ expectation from ‘bad bank’.

RBI & GOI are both seeing the individual bank’s inability to address the NPA on their own. Much of their efforts in upgrading these loans or getting them service the loan or selling off their assets to recover has not been of much success. Hence it is becoming quite apparent & imminent that RBI may soon create some kind of special purpose vehicle (stressed asset management company, bad bank etc) to address this issue at a ‘banking industry’ level.






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