India’s bad bank sends good signals
India’s plan to set up a bad bank is set to be a game-changer for state lenders pressured by rising non-performing loans. But can the country’s authorities pull it off?
India’s banks are sitting on huge piles of non-performing assets which are expected to grow even larger once the dust from the Covid-19 pandemic settles.
So finance minister Nirmala Sitharaman’s proposal earlier this year to create an asset management company (AMC) and an asset reconstruction company (ARC) – effectively a bad bank – was welcome news to bankers and investors. The idea is to consolidate and take over the existing stressed debts in the system and sell them to alternative investment funds and other investors.
The Reserve Bank of India, in its Financial Stability Report published in January, said gross non-performing assets (NPA) and net NPA ratios among banks fell to 7.5% and 2.1%, respectively, by September 2020. But it predicted that the gross NPA ratio could rise to as much as 13.5% by September this year under its baseline scenario, or to as much as 14.8% in a severe case.
The big advantage of the bad bank structure is that you can collect all your troubles and give it to someone else to take care of
That spells trouble for the health of India’s financial system, which has been plagued by various problems in recent years, from a multi-billion-dollar fraud at giant Punjab National Bank, to corporate mismanagement at firms such as Yes Bank and default issues at non-banking financial companies.