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RBI deputy governor Viral Acharya first proposed the bad bank idea in a 2015 research paper on Indian banks. Photo: Mint
RBI deputy governor Viral Acharya first proposed the bad bank idea in a 2015 research paper on Indian banks. Photo: Mint

RBI says open to bad bank option for NPAs

RBI deputy governor Viral Acharya says the central bank will look at all options, including a bad bank, to resolve the banking industry's bad loans

Mumbai: The Reserve Bank of India (RBI) will look at all options, including setting up a so-called bad bank, for resolving the banking industry’s bad loans, Viral Acharya, the newly appointed deputy governor in charge of monetary policy, said on Wednesday. 

Acharya’s comments come in the wake of the Economic Survey’s suggestion for setting up a bad bank, or public sector asset rehabilitation agency, to be funded by government securities, equity infusion from the private sector, or by using RBI’s excess capital to tackle the Rs6.7 trillion of bad loans choking the banking system.

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“I think we have to remain open to all solutions at this point because problem is quite large. I don’t think bad bank itself will work, it has to be designed right. We have to sell assets to ARCs (asset reconstruction companies) at (the) right price. How to get that right price … that is going to be key. We will think what kind of design issues might help with that," Acharya said. 

If the RBI does consider a bad bank, this would represent a reversal of its views. Former governor Raghuram Rajan argued against this concept. 

Acharya himself is a firm supporter of the idea of a bad bank to clean up the toxic loans on the books of Indian banks.

“I am absolutely proposing either explicitly or implicitly that we separate the healthy parts of the troubled banks from the healthy parts. Either as a bad bank which has those bad assets left in the original balance sheet once you have separated the good parts, or you could run it to full maturity, so we are not looking for sellers or buyers. Or you could actually pool all the bad parts together and make an asset restructuring company that looks for buyers for these assets," Acharya told BloombergQuint in an October interview. 

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He first proposed this idea in a 2015 research paper on Indian banks, which concluded that the burden of cleaning up the banking system through radical reforms rested on the government. 

The central bank, in its policy document released on Wednesday, also mentioned the need to resolve non-performing assets (NPAs) “more quickly and efficiently" to ensure timely transmission of policy rates to bank customers. 

Over the past few years, RBI measures such as strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A) have fallen flat. Under SDR, banks have the ability to convert part of their debt in a stressed company to 51% equity, allowing them to take operational control and sell the company to a suitable buyer. Under S4A, banks can break up the debt into sustainable and unsustainable halves, allowing deep restructuring in the latter, while the former continues to be serviced. 

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“On the basis of provisional data available, the broad trend is (that) while there is some alleviation in gross NPA ratio in the banking system..,for the first time in (a) few quarters this time it is seen that in (a) few banks the ratio has come down vis-a-vis preceding quarters," RBI deputy governor S.S. Mundra said.

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