A nod to the creation of a “bad bank” to settle banks’ bad debts
New Delhi: There are only a few days left before the presentation of the Union Budget 2022-23 and the proposal of Union Finance Minister Nirmala Sitharaman to create a “bad bank” during the budget presented on February 1 last year received the green signal.
State Bank of India chief Dinesh Khara said on Jan. 28 that the proposed bad bank had now obtained all necessary clearances, including those from the Reserve Bank of India. He said that this bank will start operating from March 31 with 15 cash boxes worth Rs 50,335 crore.
According to a report by the Indian Express, Khara said public sector banks would hold majority stake in National Asset Reconstruction Company Limited (NARCL), while private banks would be mainly Indian Debt Resolution Company Limited (IDRCL).
On February 1 last year, Sitharaman in his budget speech proposed a new distressed asset resolution framework, outlining measures to free public sector banks’ books of distressed assets.
Stressed assets are similar to non-performing assets (non-performing assets – NPA), written-off assets and restructured loans. In other words, those debts that are not recoverable.
Khara said some concerns have also been raised about this, but NARCL and IDRCL have now obtained the required approvals. He said that NARCL will take over identified non-performing asset (NPA) accounts from banks and IDRCL will handle the debt resolution process.
Khara said it was a structure that had been considered for the first time and that the necessary time was needed to resolve some of the issues that could possibly arise in the future.
He said all have been properly resolved. Therefore, the functioning of the two institutions should now be smooth and they should be able to achieve the purpose for which they were created.
Explaining the operation of two equal treatment bodies, NARCL and IDRCL, he said that NARCL will have the right to finalize the resolution.
According to the report, the resolution of the assets will be done in a gradual manner. A total of 38 accounts totaling Rs 82,845 crore have been identified to be transferred to NARCL. In the first phase, at least 15 accounts worth Rs 50,335 crore will be transferred to the wrong bank by March 31.
Initially, there was a plan to transfer around Rs 2 lakh crore of bad debts to bad banks. However, Khara said some of those accounts have already been resolved.
Khara hoped that after the creation of the bad bank, the resolution of the assets would happen quickly.
Explaining the operational structure, Khara said that NARCL will buy bad debts from these banks in a ratio of 15:85, where it will pay 15% in cash and issue a security receipt (SR) for 85%. The government will give a guarantee on the security receipt.
What is a bad bank?
The “Bad Bank” is being formed to separate bad debts or bad debts from banks. By doing so, the bad loan is removed from the balance sheet of the bank concerned and the bad bank takes this bad loan with itself.
In other words, the bank will buy bad debts from banks at a low price and resell them at a higher price. For example, suppose a bank has a bad loan of Rs 100, the bad bank will buy it for Rs 70 and resell the same to another company for Rs 75.
For several years, dark clouds of bad debts have hovered over the Indian banking system, due to which the economy remains sluggish.