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Relevance: There is a debate going on in India to open bad bank for solving the NPA problem with banks.
Synopsis – To address stressed assets [nonperforming loans (NPLs), a bad bank must have a fixed term and a narrow mandate with clear aims.
What are bad banks?
A ‘bad bank’ is designated financial institutions that purchase and resolve nonperforming assets (NPAs) from banks and help banks to help clear their balance sheets.
NARCL- National Asset Reconstruction Company Ltd, the proposed bad bank for taking over stressed assets of Banks, was announced in the Budget for 2021-22.
Lesson for India from China’s bad banks
- First, Bad banks should have a finite tenure – The bad bank should resolve these bad assets within a fixed period of time.
- Second, Bad banks should have narrow mandate with clearly defined goals and clear resolution strategy to resolve NPAs.
- Third, Policymakers must ensure that the NARCL’s establishment has no influence on RBI’s initiative to reduce bank holding in security receipts (SRs).
- Forth, NPAs resolution should take place through a market mechanism and not through a multitude of bad banks.
- The regulatory arbitrage between ARCs and AIFs must stop with the establishment of NARCL as a centralized bad bank.
- AIFs should be allowed to purchase bad loans directly from banks and have enforcement rights under the SARFAESI Act.
- ARCs should be allowed to purchase stressed assets from mutual funds, insurance companies, bond investors and ECB lenders.
- ARC trusts should be allowed to infuse fresh equity in distressed companies, within IBC or outside of it.
- The manager/sponsor of ARCs shall maintain the same level of interest as AIFs, i.e., at least 2.5 percent in each scheme or Rs 5 crore, whichever is lower.
Way forward-
The policymaker should learn from China’s mistake and should limit the mandate and tenure of NARCL while facilitating market-based mechanisms for bad loan resolution in a steady state.
Read more:
Source- The Indian Express
