MUMBAI: The creation of a 'bad bank' will speed up resolution of stressed assets in the banking system, but it will also require significant capital infusion in the state-run banks to meet any shortfall, says a report.
The recent economic survey mentioned about formation of a bad bank that will purchase stressed assets and take them to resolution. "The creation of a 'bad bank' could accelerate the resolution of stressed assets in country's banking sector, but it may face significant logistical difficulties and would simultaneously require a credible bank recapitalisation programme to address the capital shortfalls at state-owned banks," international agency Fitch Ratings said in a report here today.
It said the country's banks have significant asset quality problems that are putting pressure on profitability and capital, as well as constraining their ability to lend. It expects the stressed-asset ratio to rise over the coming year from the 12.3 per cent as at end-September 2016, with the ratio significantly higher among state-owned banks.
The rating agency said the banking sector will require around USD 90 billion in new total capital by financial year 2018-19 to meet Basel III standard and ongoing business needs. This estimate is unlikely to be significantly reduced by the adoption of a bad-bank approach, and could even rise if banks are forced to crystallise more losses from stressed assets than currently expected, it said.
"We believe that the government will eventually be required to provide more than the USD 10.4 billion that it has earmarked for capital injections by the financial year 2018-19 - be it directly to state-owned banks or indirectly through a bad bank," the rating agency said. It said bad bank's most likely form would be that of a centralised asset-restructuring company (ARC).
Bad bank's proponents believe it could take charge of the largest, most complex cases, make politically tough decisions to reduce debt, and allow banks to refocus on their normal lending activities, it said.