The Confederation of Indian Industry (CII) has urged the government to consider creation of multiple bad banks to address the adverse impact of non-performing assets accumulated by public sector banks in the recent past, and which have got further accentuated during the pandemic.
In its pre-budget memorandum submitted to the government, the industry body has recommended the government to consider enabling Foreign Portfolio Investors (FPIs) and Alternative Investment Funds (AIFs) to purchase NPAs.
CII President Uday Kotak said: "In the aftermath of Covid, it is important to find a resolution mechanism through a market determined price discovery. With huge liquidity, both globally and domestically multiple bad banks can address this issue in a transparent manner and get the credit cycle back in action."
As per the industry body, a robust market-based mechanism will encourage public sector banks to sell their bad loans, without fear of questions being raised later. With cleaner balance sheets, PSBs should be able to raise capital from the market, obviating the need for re-capitalisation by government, a bill which the government can ill-afford to foot at this point of time, it said.
The government has put in Rs 80,000 crore in bank re-capitalisation in FY18, Rs 1.08 lakh crore in FY19 and Rs 70,000 crore in FY20. In September this year, the parliament approved another Rs 20,000 crore of capital infusion into PSBs.
So far, the NPAs have largely been sold to Asset Reconstruction Companies (ARCs). Due to the limited capital that ARCs have, many sales are made not on cash basis but on security receipts (SR). SR is an instrument wherein the payment is made only upon recovery which means that the sale price is not a 'true sale'.
A CII statement on Sunday said that based on recent RBI data on outstanding SRs, industry estimates that the net recovery rate of ARCs is low and may be in the range of only around 10-12 per cent. The outstanding SRs is Rs 1.46 lakh crore. This represents the "non-cash" consideration received by banks against sale of loans, it noted.
The low recovery rates and the sale on the basis of SRs is not a very attractive proposition for banks. The best way to achieve true price discovery and better realizations is to open the buy side and enable a clear path for capital to flow for purchase of NPAs, as per the CII.
The buy side could be opened by allowing FPIs and AIFs to purchase NPAs, it said.
The RBI has already contemplated this in a consultative paper wherein, it has proposed that regulated entities may be permitted to purchase NPAs.
The CII has suggested that SEBI regulated AIFs may be permitted to purchase NPAs. This will be in sync with the RBI consultative paper of regulated purchaser.
Appropriate regulations may be framed by SEBI to safeguard the interest of all stakeholders.