On the subject of a bad bank, RBI Governor Shaktikanta Das on Saturday said RBI can consider the idea of a bad bank if there is any such proposal. He said the idea has been under discussion for a very long time. “We in the RBI have provided regulatory guidelines for asset reconstruction companies and we are open to look at any proposal for setting up a bad bank. If any proposal comes, we are open to examining it and issuing regulatory guidelines, but then it’s for the government and private-sector players to really plan for it,” Das said.
Delivering the Nani Palkhivala Memorial Lecture on Saturday, January 16, 2021, the Governor said the, government and private players have to plan for it. “If there is a proposal to set up a bad bank, the RBI will look at it. We have regulatory guidelines for ARCs (asset reconstruction companies). We are open to look at any proposal to set up a bad bank. If any proposal comes, we are open to examine it,” he said.
A bad bank takes over the NPAs or bad assets from banks at a discounted price and sells it to investors by putting a turnaround plan in place. While the bank always has the option of taking legal action on the defaulting borrowers, it is not always economically feasible to do so. By selling the bad loans to bad bank may be able to clean up their balance sheets and keep the business moving towards better avenues.
Many industry experts suggest that in a couple of years, the proportion of stressed assets in the banking system could jump to as high as 18 per cent from around 11 per cent at present. To tackle this upcoming challenge, the banking industry led by Indian Banks Association (IBA) has proposed the setting up of a government-backed bad bank and in the last May submitted a proposal for setting up a bad bank to the finance ministry and the RBI, proposing equity contribution from the government and the banks. This was based on an idea proposed by a panel on faster resolution of stressed assets in public sector banks headed by former PNB Chairman Sunil Mehta. This panel in 2018 had proposed an asset management company (AMC), ‘Sashakt India Asset Management’, for resolving large bad loans.
Former RBI Governor Raghuram Rajan wrote in his book “I Do What I Do”, comprising his commentary and speeches as the then RBI Governor opposed the idea of setting up a bad bank with a majority stake by banks, arguing it would solve nothing.Rajan argued that a government-funded bad bank would just shift loans “from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters”.“Indeed, if the bad bank were in the public sector, the reluctance to act would merely be shifted to the bad bank. Why not instead infuse the capital that would be given to the bad bank directly into the public sector banks? Alternatively, if the bad bank were to be in the private sector, the reluctance of public sector banks to sell loans to the bad bank at a significant haircut would still prevail. Once again, it would solve nothing,” he wrote in his book.