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Home / News / India /  Multiple bad banks needed to solve NPA problem: CII

The Confederation of Indian Industry (CII) has urged the government to consider setting up “multiple bad banks" to address the problem of mounting non-performing assets (NPAs) of state-owned lenders, which has worsened due to covid-led disruptions.

A ‘bad bank’ buys the bad loans of other lenders and financial institutions to help clear their balance sheets.

“In the aftermath of covid, it is important to find a resolution mechanism through a market-determined price discovery. With huge liquidity, both globally and domestically, multiple bad banks can address this issue in a transparent manner and get the credit cycle back in action," CII president Uday Kotak said in a statement.

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This is the latest proposal on bad banks. In May, the Indian Banks Association (IBA) had suggested to the finance ministry and RBI to set up a bad bank. On Friday, economic affairs secretary Tarun Bajaj said the government is exploring all options, including establishing a bad bank, to improve the health of the banking sector. The government has recapitalized public sector lenders and will continue to pump in capital when needed, Bajaj added.

As part of its pre-budget recommendations, CII urged the government to consider enabling foreign portfolio investors (FPIs) and alternative investment funds (AIFs) to purchase NPAs.

“A robust market-based mechanism will encourage public sector banks to sell their bad loans without fear of questions being raised later. With cleaner balance sheets, PSBs should be able to raise capital from the market, obviating the need for recapitalization by the government, a bill which the government can ill afford to foot at this point in time."

The Centre has already announced recapitalization of 20,000 crore for this fiscal year to support state-owned lenders as the covid-19 crisis put borrowers under pressure. In FY20, the Centre had promised 70,000 crore to “boost credit for a strong impetus to the economy". In 2017-18 and 2018-19, there were budgetary provisions as well as recapitalisation bonds.

So far, most bad loans have been sold to asset reconstruction companies through the purchase of security receipts (SR)—an instrument where payment is made upon recovery. This indicated that the sale price is not a ‘true sale’.

According to data on outstanding security receipts and industry estimates, the net recovery rate of ARCs is low—may be in the range of only around 10-12%. “The outstanding SRs is 1.46 trillion. This represents the “non-cash" consideration received by banks against sale of loans. The low recovery rates and the sale on the basis of SRs is not a very attractive proposition for banks. The best way to achieve true price discovery and better realisations is to open the buy side and enable a clear path for capital to flow for purchase of NPA," CII said.

According to the RBI, gross NPAs of banks may increase from 8.5% in March 2020 to 12.5% by March 2021.

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