Tuesday, 21 March 2017

Indian Bad Bank

Facts:

Non Performing Assets: Advances which are not recoverable / in default.

Total Gross NPA of Public and Private Sector banks stood at Rs.6 lakh crore (as on June 2016).

The above was due to the cleaning exercise undertaken by then Reserve Bank of India Governor Mr. Raghuram Rajan.

So the solution offered by bankers / economist was to create a “Bad Bank”.

A Bad Bank is one where the portion of distressed assets of other Banks is stored. These distressed assets are referred to as Non Performing Assets.

The supporters for the Bad Bank : Mr. Aditya Puri, Mr. Arvind Subramanian, Mr. Uday Kotak and surprisingly Mr. Raghuram Rajan was not in favour of it.

Let’s look into definition of Bad Bank from Investopedia:

“A bank set up to buy the bad loans of a bank with significant nonperforming assets at market price. By transferring the bad assets of an institution to the bad bank, the banks clear their balance sheet of toxic assets but would be forced to take write downs. Shareholders and bondholders stand to lose money from this solution (but not depositors). Banks that become insolvent as a result of the process can be recapitalized, nationalized or liquidated.”

The big question, who will recapitalize banks?

No marks for guessing, in India, the Government will have to step in (some newspaper already state that this should not be considered as Government “Bailout of crony capitalist”. I say : Yes?).

Today no one is aware about breakup of NPA, is it due to:

  • Loan waivers by Government 
  • Political loan to Entrepreneurs / Corporate etc  
  • Dubious Loan sanctioned due to efforts of Loan brokers / bank credit sanctioning team
  •  Genuine bad business

In India this thought process is echoed after the bankers of west started claiming it to be a appropriate one.

Jamie Dimon (JP Morgan Chase) states it to be “a great vehicle” for banks. We know the vital role played by bankers in 2008 credit crisis.

It is surprising that present Deputy Governor of Reserve Bank of India Mr. Acharya had stated in his research paper “The precarious condition of Public Sector Banks”:

“The onus of remedying this situation through radical reform lies primarily with the Government.”

In short tax payers’ money should be funneled into the incorrect decisions taken by the credit sanctioning authorities to businessmen.

Who are the beneficiaries?

  • Loan brokers / Bankers collided with entrepreneurs / corporates
  • Hiding inefficiencies of recovery department at Bank
  • The bankers belief that nothing can be done for recovery of Bad loans
The real challenge of Bad Bank according to Morya Longo is:

“The real problem, however, comes in the following step: the “Bad Bank” must re-sell the bad credit within three years, ideally for the same price they paid for it. If they can’t, they have to sell it for less and, according to the EBA, that loss would be returned to the original bank. “.

In India to whom the bad credit will be sold?

Answer: Ordinary Tax Payer by Tax Saving Bonds.

A bad bank will be like a Loan waiver / Government Bail-out and something which should be avoided at all cost.

Private bankers state this will help to revive the credit in the economy as Bank NPA will be artificially improved and more loans / credit can be extended to business for economic growth.

My question is can Bankers guarantee that henceforth (after Bad Bank) there will be no NPA?

I don’t know whether any regulatory requirements regarding Bad Bank, passed by the Parliament / listed down by Reserve Bank of India.

I think handling Bad Bank is not going to be an easy task and it’s better to ask banks to reduce Non Performance Assets by strong recovery mechanisms.

Prime Minister Modi Ji " Please do not endorse Bad Bank".

Reference:

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