BAD BANK – BIG BAD IDEA

  Over the weekend, the RBI Governor during a lecture said that RBI was open to considering any serious proposal on the setting up of a “bad bank.” And that has opened a pandora’s box. this talk of the Bad Bank began way back in 2017 and nothing really moved ahead. Once again, the debate on the Bad Bank is back on the table and the jury is still out.

As expected, this Bad Bank, undoubtedly, will be BIG and ugly and it is nothing but PARA - Public Asset Rehabilitation Company.

The concept of the Govt is really very simple, obviously borrowed from developed countries which have such Bad Banks. There will be this bank which will buy up all the Non Performing Assets (NPAs) of all the 28 Public Sector banks (PSBs). The PSBs, instead of writing them off, sells it to this bank, obviously at a discount and shows the profit or loss earned in the balance sheet. For the PSB, that NPA gets over the moment it sells it to the bank. The NPA buying bank will pay some money and balance might be given in the form of securities as and when it manages to sell the distressed asset.

Before we run down this BIG idea, let’s look at the possible advantages.

• PSBs will have cleaner balance sheets as all the bad will get transferred to PARA.
• PSB CMDs will be relieved of the onerous task of credit recovery and this new bank can do the job better as it has no relationship with the said CEO of the defaulting company.
• PSBs can concentrate on growth and shift focus from recovering credit.
• Banks get de-risked and they can become healthy enough to recapitalize themselves.

Well, now a look at the possible de-merits.

• A Bad Bank is basically transferring bad loans from 28 banks to one single bank – the NPA problem does not vanish; it just gets concentrated into one bank.
• The bank will take over only the big NPAs and of core sectors like infra and basic metals, which top the NPA list. But here itself, each company would have a debt averaging some Rs.15,000 to Rs.20,000 crore. Can you imagine how much NPA this bank will have to take over?
• Where will the huge capital required to set up such bank, which will need very deep pockets to buy NPAs, at least to the tune of Rs.70,000 crore, come from? Indradhanush itself for Rs.75,000 crore and spread over four fiscals.
• If Govt owns majority stake, where is the autonomy? The case will be exactly what PSBs are currently going through.
• Setting up a Bad bank is complex and expensive because it requires setting up a separate organization, equipped with a skilled management team, IT systems and a regulatory compliance set-up.
• The big problem – how do these banks value the assets and how do they arrive at a pricing mechanism for buying the NPAs?
• Will the bad bank sell the NPAs that it buys to investors – FIIs and others at a huge haircut? And to make them look attractive, will the Govt stand as a guarantor?
• Devising a transparent method, free from crony capitalism and conflict of interest, for identifying such projects will be a key challenge in the design of a bad bank.
• A one-size-fits-all approach, which is what this bank will do, simply will not work.

The Bad Bank is nothing but an Asset Reconstruction Company (ARC) owned by the Govt.  This is just like shoving all the dirt under a new carpet.

Instead the Govt should focus on reinstating the operation of the Insolvency and Bankruptcy Code (IBC) and consolidate the PSBs, wherein the Govt should bring down stake to below 51% in not-so-strong banks and get out of completely from weaker ones.

The Bad Bank will be a temporary solution as the PSBs will continue to pile up new bad debt as their way of functioning, lack of autonomy, political interference; all will remain same. The aim should be to address the root cause and that is something which this Bad Bank will not resolve.