Bad bank not a good idea unless key issues are addressed: Uday Kotak

  • The idea of a bad bank keeps on re-surfacing every three-four years when stressed assets in the banking sector moves northward
  • Currently, banks sell their bad loans to asset reconstruction companies (ARC) as per the prudent norms of the RBI

PTI
Updated8 Jun 2020
A file photo of Uday Kotak, founder of Kotak Mahindra Bank. Photo: Abhijit Bhatlekar/Mint
A file photo of Uday Kotak, founder of Kotak Mahindra Bank. Photo: Abhijit Bhatlekar/Mint

Setting up of a bad bank to deal with the problem of mounting NPAs is not a good idea and will not yield desired results unless some key aspects like transparency and recovery rate are addressed, newly-elected president of CII Uday Kotak said.

Citing an example of Stressed Assets Stabilization Fund (SASF), set up by erstwhile Industrial Development Bank of India (IDBI), Kotak said it did not work well.

"I think we have tried the bad bank in the past. If you recall when IDBI had challenges in the early 2000s, there was an IDBI SASF, which was created. A part of non-performing assets (NPAs) of IDBI were moved to that SASF," Kotak told PTI in an interview.

SASF was constituted by the Government of India pursuant to a provision in the Union Budget 2004-05, a special purpose vehicle (SPV) trust for acquiring NPAs of erstwhile IDBI. As many as 636 stressed and non-performing cases with aggregate loans of over 9,000 crore were hived off to this SPV.

However, it could only recover less than half at 4,000 crore at the end of March 2013, according to a 2014 audit report by the Comptroller and Auditor General of India (CAG).

The idea of a bad bank keeps on re-surfacing every three-four years when stressed assets in the banking sector moves northward.

The government was toying with the idea of creating a bad bank in 2016. Even the Economic Survey 2017 had proposed this idea, suggesting the creation of a bad bank called Public Sector Asset Rehabilitation Agency (PARA) to help tide over the problem of stressed assets.

Once again, the proposal got the attention of government and financial sector regulators and the idea was discussed during the Financial Stability and Development Council (FSDC) meeting last month.

"If you’re floating an idea of a bad bank at the system level, there are two or three important issues which need to be addressed,” said Kotak, who is also managing director of Kotak Mahindra Bank.

First, what is the transfer price on the basis of which these loans will be sold to the bad bank, because the value of that has to be decided through a fair and transparent mechanism; and second, the governance of the bad bank has to be extremely clear, he said.

Finally, recovery is the key to deciding whether to have a bad bank or not, he said, adding that “these are national assets created out of public money. We must have the ability of being able to recover more... If we believe the recovery will improve, then a bad bank makes sense. If not, it does not make sense."

Currently, banks sell their bad loans to asset reconstruction companies (ARC) as per the prudent norms of the Reserve Bank of India.

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