Government exploring setting up bad bank, all other options

The government is exploring all options, including setting up of a bad bank, to improve the health of the country's banking sector, Economic Affairs Secretary Tarun Bajaj said on Friday.

He also said the government has recapitalised public sector banks and continue to pump in capital as per requirements.

"We are looking at various options, including the option you mentioned (of bad bank), and it is still in the works... The RBI has been asking us, and we ourselves also feel that we need to recapitalise. We have recapitalised to a large extent and this year too, we have kept some money for recapitalisation so that commitment is there...," he said.

Bajaj was responding to a query on whether the government would consider setting up of a bad bank as a one-time measure for reducing the burden of Non-Performing Assets (NPAs) of the public sector banks.

There have been difference of opinion on setting up of a bad bank.

In June, Chief Economic Adviser K V Subramanian said that setting up of a bad bank may not be a potent option to address the non-performing asset woes in the banking sector.

Subramanian had also said that when a bank sells bad loans, it has to take a haircut because when ₹100 goes bad, the actual amount that can be expected is lower than ₹100 and that leads to haircut.

"So, when the bank has to sell that loan to an ARC (Asset Reconstruction Company) or a new institution that is created, in that case, it has to take haircut. When it takes haircut that will impact the P&L (Profit & Loss). And that is one of the key aspect affecting the selling of loans.

"So, till that particular aspect is not addressed, creating a new structure may not be as potent in addressing the problem," he had said.

Currently, banks sell their bad loans to ARCs as per the prudent norms of the Reserve Bank of India.

Even industry body CII's President Uday Kotak had said that 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.

However, former RBI Governor D Subbarao had made a case for setting up of a bad bank saying it was not just necessary but unavoidable in the present circumstances when NPAs are likely to balloon and much of the resolution will have to take place outside the IBC framework.

To help the MSME sector, Bajaj, on Friday, said the government has announced 100 per cent guarantee for the smaller industries so that the banks could lend to them.

Last week, the finance ministry, said that banks have sanctioned loans worth ₹2,05,563 crore to about 81 lakh accounts under the ₹3-lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector that was impacted by disruptions caused due to the coronavirus pandemic.

Of this 40 lakh MSME accounts have received ₹1,58,626 crore till December 4.