Can a ‘bad bank’ fix the NPA issue?

The newly introduced Insolvency and Bankruptcy Code (IBC) was touted as the game changer that would help banks to get rid of the toxic loan pile in a time-bound manner.

Published: 15th June 2018 02:27 AM  |   Last Updated: 15th June 2018 02:27 AM   |  A+A-

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Image for representational purpose only. (File photo | Reuters)

Express News Service

MUMBAI: Even as Sunil Mehta-led committee is chalking out the modalities of a bad bank, opinion is divided on the need and effectiveness of the proposed NPA resolution mechanism. The newly introduced Insolvency and Bankruptcy Code (IBC) was touted as the game changer that would help banks to get rid of the toxic loan pile in a time-bound manner — 270 days to be precise — but in reality, it has proved otherwise.

Will the proposed Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) come to the rescue of lenders this time? Bankers hope so, but market watchers are unsure about the funding structure and its success rate. The timing of the proposal also raises doubts if bankers and the government are uncertain about the resolution process or if loan recoveries are unviable under IBC.

For instance, of the 12 large stressed accounts, two completed the process, while 10 others are stuck up. Similarly, RBI’s second list comprising 29 accounts too are undergoing resolution nearly a year later. Ditto even for smaller accounts with over 500 of the 700-odd cases that NCLT undertook last year are yet to conclude. “We believe the slow IBC process, poor power sector metrics with high levels of stress, and interrupted credit flow are forcing the hand of the government (to consider AMC/ARC structure),” noted Jefferies’ analysts Nilanjan Karfa and Harshit Toshniwal.

Bankers feel there’s a need for a ‘good and effective’ NPA resolution system to regain cleaner balance sheets. “An AMC/ARC is another method of trying to fix the problem. What we need is to have multiple mechanisms to solve bad loans,” said a senior banker, downplaying the time-taking resolution process under IBC as the reason for re-visiting the bad bank concept.

Cleaner state-run banks are a necessity for the NDA government ahead of the general elections in May 2019. After trying out multiple measures, stripping bad loans off from the books seems to be the only quick fix to ensure that the 21 PSBs indeed have ‘fair and true’ balance sheets.

Also, according to Jefferies, the bulk of the systemic stress is concentrated in power sector, making up roughly two per cent of the total loans. Weak demand, unstable prices, and an inability of Discoms to pay on time imply large potential haircuts if these were auctioned off or liquidated. “Consequently, recovery of fair price will require a change in operating environment as well, which will be time-taking and is perhaps one of the biggest reasons why an ARC/AMC structure makes sense,” it noted.

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