Paving the way for a major clean-up of bad loans in the banking sector, the Cabinet recently cleared a guarantee programme for securities to be issued by the newly incorporated ‘bad bank’. The goal of a bad bank is to optimise asset utilisation, free up capital, and empower banks to effectively lend. Bad banks must come with a sunset clause and wind-up after 90 per cent of non-performing assets (NPAs) are recovered. Bad bank is not for perpetuity and preventing NPAs is the real solution, Dr Vikas Singh, president, Crux Management Services tells Y V Phani Raj in an interview. Excerpts-
The business-as-usual approach hasn’t worked. Something needed to be done. NPAs in some banks are almost at 10 per cent. Resolutions have been sluggish as the banks and the reconstruction companies invariably differ on the fair value of these assets. The PSU bankers often are fearful of being hounded for ‘underselling’ assets. The government ownership of the ‘bad bank’ will provide confidence and resolve several cases. NPA resolution will release assets, free up capital, clean the books, ‘enable’ banks to start afresh and intensify lending. In addition, in an asset-deficient economy, assets thus released can be optimised and drive economic growth. Bad banks have the right framework to ‘resolve’ the sticky assets and legacy issues.
Need of the hour
The banks need to work on a better lending framework and effective governance. Both the lenders and auditors must take responsibility and be accountable. Internal audit system needs to be revamped. The IBC and several other signals from the government have reined in the reckless borrowers. It is time to change that.
Bad banks have been in existence for over 40 years (but came into prominence during the 2007 global financial crisis). There is much to learn. The NPAs elsewhere are often driven by events. India’s NPA problem is both systemic and systematic. We are beset with crony capitalism (loaning decisions have been taken in Delhi). Ineffective laws and administrative mechanisms make it difficult to recover bad loans, worsening the crisis. Worldwide, bad banks have cured banks of NPA malice. South Korea, USA, Germany, and most European economies have benefited. In China, it has been a mixed bag.
India needs both administrative & judicial reforms, and additionally effective regulations and enabling institutions. Structure and framework of the bad bank is important, equally important is the team. Implementing agencies must be agile and empowered. The government must separate ownership and management. It should empower and not interfere.
Bad banks will help clean-up the banks’ balance sheets, enable them to refresh their books, focus on lending, and reinforce confidence. Clean-up will spur economic activity, trigger consumption and boost the macro economy. Bad bank framework rewards faster identification & resolution, and quicker monetisation of NPAs. But how the NPAs will be valued will be critical. Bad banks must devise a valuation process that is fair, more importantly one that ‘works’. The government may need to tweak the tax laws so that profit realised could be treated as capital gains, not income.
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