In order to help the already battered balance sheets of lenders, a parliamentary panel recommended that the stressed assets of banks must be transferred to the proposed bad bank at book value itself.
According to a report by Business Standard, the Parliamentary Standing Committee on Finance said the bad bank will help in saving time and avoiding delays in resolving soured loans through consolidated decision making.
The report further states that the panel urged the Reserve Bank of India to clearly define every step of the procedure to remove any ambiguity or discretion from the banks’ side.
Finance minister Nirmala Sitharaman had on February 1 announced plans to set up a new asset reconstruction company (ARC) and asset management company (AMC) as part of a strategy to clean up banks’ balance sheets.
Announcing its version of the bad bank, the government said it will set up an Asset Reconstruction and Management Company to take over bad loans.
A bad bank act as an aggregator of all stressed assets in the system. It is set up to buy the bad loans and other illiquid holdings of another financial institution. Once toxic assets are transferred to this entity, attempts for an early resolution by experts begins while originating banks can focus on their business.
The existing stock of bad loans is a big worry for banks. At the end of September last year, the total gross NPAs of the banking system was 7.5 percent of the overall industry loan book.
This is expected to shoot up to 13.5 percent by March-September this year, according to the Reserve Bank of India’s (RBI) projection.
In a worst-case scenario, the bad loans are likely to rise up to 15 percent of the total loans. This will be a big shock to banks as they will require significantly higher capital to cover the impact of bad loans. Moving the existing stock to a separate entity at the earliest could be an escape route.