The Budget2021 hashtag has refused to die down even a month after the Finance Minister of India gave a budget targeted at surviving and sustaining through the tumultuous pandemic phase. With each expectant sector getting some assurance or aide, one would expect the declarations from the tablet to make ripples. As for the NBFC sector, the first gift from the goody bag was in the form of setting up of the asset restructuring and management company, or as is popularly known, bad banks. This move was anticipated and awaited because the pandemic (and the moratorium) stricken lending market is suffering from a huge surge of bad assets. In order to settle these disproportionate bad debts by selling them off at the market price is a possible way out to unburden the lending institution whose risk profile is threatened. Thus, the announcement to create bad banks does matter. The other announcement that the NBFCs awaited with bated breath was the reduction in the loan limit to smoothen the recovery, from Rs 50 lakh to Rs 20 lakh, so that the SARFAESI Act can be used (if required) to recover the loans from the defaulters. Though this move supports secured loans, it has come as a relief. The other big move came as digitalisation was supported through the proposal to incentivise digital payments. This move will help the NBFCs and Fintechs to not only lend digitally, but also to get the EMI payments digitally.
The question about whether the threatening NPA will be helped through these (and the other) announcements still remains. The NPA crisis is a matter of considerable worry. Before the pandemic struck, the estimated non-performing assets was at 7.5 per cent by September 2020, and the financial health of the economy was already a worry. But within the next four odd months it doubled and rose beyond 14.8 per cent–this data was shared by the Reserve Bank of India in its bi-annual Financial Stability Report (FSR). Though one may argue that the NPA might seem like a recurring monster in the economical scene, yet this needs to be curbed before it impacts the gross NPAs. It is here that the bad banks could become the saviours.
The lending institutions are suffering from rising delinquency. The borrowers (irrespective of the size of their loan tickets) have been suffering due to either joblessness, or the slashes in the pay. Yes, the market is slowly and gradually opening up in terms of jobs, but the massive healing required is still a little far. Banks have been proposing restructuring of the loan repayment cycles in most cases so that the collection can continue in smaller capacity. This would help maintain the liquidity of the asset. This, however, might not be able to strike-through the need for bad banks. As opposed to the villainous name given to it, ‘bad banks’ are known as helpful sponges across the world. With our present circumstances, the on-balance-sheet guarantee, creation of a separate bad asset unit within the institution, or the creation of a new entity by the lending institution itself are not best-suited models; the need of the hour is a special purpose entity (SPE) backed by the government.
Across the globe, first world countries such as the United Kingdom, France, Germany, and other European countries have used the bad bank strategy as and when they faced financial crises. For instance, the creation of Retriva and Securum by McKinsey and Company helped Sweden through its 1992 banking crisis. The first case of handling a whopping 1.4 billion of bad assets through the creation of Grant Street (the bad bank entity) by the Mellon Bank, in 1988, is the first known case of this format of debt resolution. The success of the model is in the fact that by 1995 not only was the mission accomplished, but the bondholders retained profits even after Grant Street was dissolved. This was another revolution that Pittsburgh saw.
In the Asian continent, the creation of the Indonesian Bank Restructuring Agency, or IBRA, is a success story in averting the Asian banking crises of 1997–98.
In the Indian scene, we hold on to our SPE suggestion, where the economic value of the assets should be considered at the time of the purchase. The proposal to recruit specialists from across the industries should be followed through in the creation of the entity with minimal or no political influence to hamper the initiative. Though the safety net provisions need to be retained and curated and the legal and contractual hindrance need to be overlooked, it would be beneficiary if the government retains a minority stake in the proposed bad banks. Here, the idea of ‘what’s in a name’ is fair to be quoted as whatever be the name of the bad bank, our interest is in seeing the recovery of the financial health of the Indian economy.
Rishabh Goel is the co-founder and CEO at Credgenics.
As told to Rounak Gunjan.