Home >Companies >People >Lenders say this is the right time to create a bad bank

Bankers bracing for a surge in bad loans after the coronavirus outbreak believe the time is right to create a bad bank and segregate toxic assets from the good ones.

Speaking at Mint’s Pivot or Perish banking webinar on Thursday, bankers said this will let banks focus on giving out loans while letting the bad bank manage non-performing assets (NPA) and recover them.

Zarin Daruwala, chief executive, India, Standard Chartered Bank, said the bad bank concept and the Troubled Asset Relief Program (TARP) worked extremely well in the US after the Lehman crisis. She also referred to Danaharta, a government-backed asset management company in Malaysia to manage bad assets.

“Similarly, in Malaysia, we have seen the Danaharta experience which was an extremely good experience and the way they went about it, they actually told the banks that if you do not sell the assets, you will have additional provisioning," said Daruwala.

According to Daruwala, it is a good time to look at a bad bank concept; however, certain things need to be kept in mind. She said it is very important to have experienced professionals managing the initiative. “It also frees up existing banks from focusing on stressed assets to focusing on incremental credit. The other benefit of a bad bank is that it aggregates the debt in one place. Today, if the customer wants some resolution and there are 10 banks to agree on a common approach, the health of the borrower deteriorates (because of the delay). It makes a lot of sense in my personal view," she said.

Arundhati Bhattacharya, chief executive, Salesforce India, pointed out that the provision levels are high enough today for the banking sector to allow a bad bank to happen. Arijit Basu, managing director, State Bank of India agreed that provisions by the banking system at present is a crucial difference.

“It is a humongous challenge to aggregate the debt and solve it. This is the thinking that banks had when we decided to recommended it," said Basu.

The Indian Banks’ Association, a banks’ lobby has already submitted a proposal to the government and RBI seeking the formation of a bad bank to help resolve bad loans.

Basu explained that most banks have been able to clean up their balance sheets in the past couple of years and have a good buffer of provisions.

“At least for SBI and for most of other banks, the clean-up that was required because of the NPA build-up for reasons like the RBI asset quality review and the stress on the corporate book has been happening over the last two-three years. The gross NPA ratio, net NPA ratio and also the likely pipleline of bad loans are now hardly 15-20% of what we used to see earlier," said Basu.

On credit pick-up, Basu said he expects loans to grow from the December quarter of FY21. “As far as the retail side is concerned, the bank is trying its best. From the second half of May, retail demand is slowly coming back, home loans and personal loans are again seeing an uptick," he said.

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