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The Indian Banks’ Association will reportedly soon apply to the Reserve Bank of India (RBI) for an okay to set up a 6,000-crore National Asset Reconstruction Co. Ltd (NARCL). A stake of 51% in this so-called bad bank is to be held by state-run banks, and the rest by private lenders. The idea of a new entity to relieve them of their bad loans, allowing them to focus on project finance, was proposed in this year’s budget. Some 22 dud assets worth an estimated 90,000 crore have already been earmarked for transfer to NARCL, as reported.

An active market for bad debt has long eluded us, and we have seen various mechanisms to lighten banks of their burden underperform their promise. Neither a wide-ranging asset reconstruction law nor debt recovery tribunals helped. And asset reconstruction companies that already exist have not had an easy run, partly because of fluctuating norms for the acquisition of non-performing assets. How well NARCL will perform may depend on whether RBI uses its launch as an occasion to re-examine the whole business of buying impaired assets from the perspective of proper price discovery. Auction formats can always be improved upon.

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