Can India's bad bank resolve NPAs fiasco?

The concept of a Bad Bank as a panacea for commercial banks to resolve their ills in the form of bad loans was debated almost for a decade before the Finance Minister, Nirmala Sitharaman, finally put a seal of approval to it in her last budgetary speech. The time for discussing pros and cons got over. But the issues raised during the debate need to be kept in mind as also the experience of Asset Reconstruction Company India Ltd (ARCIL), the first bad bank of India, to make a success of the new experiment.

This move will certainly create specialisation in the field of recovery of bad loans and give time to bank managements to pursue business development, not being bogged down with the long and arduous recovery process. Sovereign guarantee for the security receipts issued by the Bad Bank will help develop confidence all around. Government looks willing to stick its neck out for the good of banking sector and have moved pretty fast since the budgetary announcement to ensure an early birth of National Asset Reconstruction Company (NARC), so christened the bad bank. Padmakumar Nair from SBI, has already been appointed as the CEO of the proposed outfit. His experience in handling NPAs at the largest bank in the country and the knowledge gained about the large borrowers will come handy.

ARCIL has not proved itself the panacea for bad loans in this country as the NPA level has continued to rise over the years. It even made a first ever loss of Rs 87 crore in FY21 due to steep write off requirement. Its asset level is one fourth of the younger entrant Edelweiss ARC. This even brings one to question whether the NARC is a good idea for public sector banks. But we are past that stage. It has to be made a success if the country has to build on the record combined profit of Rs 1,02,252 lakh crore of commercial banks in FY21, in a year battered by the pandemic, against a net loss of nearly Rs 5,000 crore for the industry in FY19. NARC will have a big responsibility in this journey.

But challenges galore because of complicated processes, involvement of multiple agencies, time taking court proceedings and the vigilance authorities probing with suspicious eyes. Notwithstanding these, a way has to be found to succeed. Government also needs to look into these areas.

The most crucial factor in this process is the valuation of the assets being transferred. Concept of book value may lead to an inflated acquisition price, resulting in a still birth of NARC. Bankers fear future questioning on such decisions and are reluctant to take a realistic call. In order to shield bank managers from any arbitrary criminalisation of NPA sales as also to move the process, there should be independent valuation of assets, by a third party, say an Audit firm, which can be reviewed by another audit firm before being put into action. Such arm's length pricing is the best way out.

The decision process also has to be made expeditious. Normally, it is suggested that 75 per cent of lenders by value be required to transfer the loans to an ARC. This should be kept at two third of the value, the remainder being mandatorily required to agree. Once the loans land in the lap of the NARC, the managers there should have expertise and desire to segregate the assets into two groups, those that are permanently illiquid and those that are likely to find value, if nursed. The former should be sold off at first opportunity. For the latter, not only capital support should be provided but proper professionals also be taken on board for their revival.

Government should also not come in the way of sale of 'fraud accounts'. As of March, 2021, this is quantified at Rs 5 lakh crore. There is no point keeping them without financial action just to find what went wrong and to punish those responsible. This process takes a long time and all the remaining value can also be lost. While the investigation may continue by retaining appropriate records, government should allow sale of such assets without transferring any liability of fraud to NARC, not even the need to get involved in the investigation process.

Work is progressing on multiple fronts with an ambitious goal to launch the NARC in July. Capital structure is being worked out, with most banks participating in this exercise, which will be followed by an application to RBI for a license. The banking industry is watching the developments with bated breath, public sector banks having already shortlisted 28 bad loan accounts valued over Rs 1 lakh crore.

(The author is an ex Managing

Director of SBBJ (SBI Group)