Government plans to create a bad bank, all other options
NEW DELHI The government is exploring all options, including the creation of a failing bank, to improve the health of the country’s banking sector, Economic Secretary Tarun Bajaj said on Friday.
He also said the government has recapitalized public sector banks and continues to inject capital as needed.
“We are looking at different options, including the option you mentioned (of bad bank), and it is still ongoing … The RBI has asked us, and we ourselves also think we need to recapitalize. recapitalized to a large extent and this year too we have kept money for recapitalization so that that commitment is there … “he said.
Bajaj was responding to a question about whether the government would consider setting up a failed bank as a one-off measure to reduce the burden on Non-productive assets (NPA) public sector banks.
There have been differences of opinion on setting up a bad bank.
In June, chief economic adviser KV Subramanian said that setting up a bad bank may not be an effective option to address the problems of non-performing assets in the banking sector.
Subramanian had also said that when a bank sells bad debt, it must discount it, because when ??100 is bad, the actual amount that can be expected is less than ??100 and that leads to the haircut.
“So when the bank has to sell this loan to an ARC (Asset Reconstruction Company) or a new institution that is created, in that case, it has to take a discount. When she takes a haircut that will impact the P&L (Profit & Loss And this is one of the key aspects affecting the sale of loans.
“So until this particular aspect is addressed, creating a new structure may not be as effective in solving the problem,” he said.
Currently, banks are selling their bad loans to CRAs in accordance with the conservative standards of the Reserve Bank of India.
Even the chairman of the industry body CII, Uday Kotak, said that setting up a failed bank to solve the problem of mounting NPAs is not a good idea and will not give the desired results unless certain aspects are met. keys such as transparency and recovery rate are not addressed.
However, former RBI Governor D Subbarao had argued for the creation of a failed bank, saying this was not only necessary but inevitable under the current circumstances when NPAs are likely to swell and that much of the resolution will have to take place outside the framework of the IBC. .
To help the MSME sector, Bajaj said on Friday that the government announced a 100% guarantee for small industries so that banks can lend to them.
Last week, the finance ministry said banks had sanctioned loans worth ??2.05,563 crore at around 81 lakh accounts under the ??3-lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector that has been affected by the disruption caused by the coronavirus pandemic.
Of these 40 lakhs, MSME accounts received ??1,58,626 crore until December 4.
Never miss a story! Stay connected and informed with Mint. Download our app now !!