Tag: #NPA

Bad Bank

A bad bank is a financial entity set up to buy non performing assets (NPAs), or bad loans, from banks. It is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.It buys bad debtors of a bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.

The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints. After the purchase of a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in purchasing it. A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it paid to acquire the loan from a commercial bank. A supposed advantage in setting up a bad bank is that it can help consolidate all bad loans of banks under a single exclusive entity. The one time transfer of assets out of the balance sheets will relieve banks of their assets out of bank’s balance sheets will relieve banks of their stressed assets and allow them to focus on their core business of lending. Banks with clean balance sheets can mobilize fresh capital from the market and improve their credit growth, which is crucial for spurring investments. Bad banks would also give an impetus to India’s economic growth , which has been affected by heightened risk aversion arising from the unbridled growth in NPAs . And the bad bank will unlock trapped capital, which will be a net positive for the economy in the long term. The idea of a bad bank has been tried out in countries such as the U.S.,Germany, Japan and others in the past. Some experts believe that by taking bad loans off banks, a bad bank can free capital of over ₹ 5 lakh crore that is locked in by banks as provisions against these bad loans. This will give banks the freedom to use the freed customers.

It is argued that creating a bad bank is just shifting the problem from one place to another.Without fundamental reforms to solve the NPA problem, the bad bank is likely to become a warehouse for bad loans without any recovery taking place. An important concern is regarding mobilizing capital for the bad bank. In an economy hit by the pandemic, it is hard to find buyers for distressed assets and the Government is also in a tight fiscal position. There is no clear procedure to determine at what price and which loans should be transferred to the bad banks.

Former RBI Governor Raghuram Rajan was cautious about the idea of a bad bank in which banks held a majority stake. In his book ‘I Do What I Do,’ the celebrated economist and banker had pointed out that if a bad bank was in the public sector, the reluctance to act would merely be shifted to the bad bank.

Sources : The Hindu, Drishti IAS , Wikipedia

… Why I resigned

After one and a half years of resignation, citing the personal reasons, Urjit Patel has now revealed the real reason of his resignation.

In his book Overdraft- Saving the Indian Saver, he has explained that “the moves to dilute the Insolvency and Bankruptcy Code” led the cause of his sudden exit from the central bank.
Patel was served as the 24th governor of Reserve Bank of India since September 2016 to December 2018.

Reasons for the Tussle

Former governor of the Central Bank says that,
“Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued,” “Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency.” He adds that “there were requests for rolling back the February circular” and “a canard was spread” to discredit the rules, including by incorrectly suggesting that small businesses would suffer disproportionately.

NPA build up in UPA Regime

Urjit Patel blames for the piling up of NPAs to the UPA government. He writes that, “The government is responsible for ensuring adequate capital for banks that are under its ambit on sustainable basis. The dominant owner pre-2014 didn’t question risk controls in government banks even as it received significant dividends,” 
He also adds that, “There was a failure to acknowledge and rectify government banks’ inability to identify poor performing assets; and restructure and react quickly to improve recovery or cut losses.

Explaining the situation at that time, he writes, “A number of government banks did not have senior management in place, and governance suffered. This is a perennial shortcoming on account of bureaucratic inertia and political meddling. Ditto for the banks’ board of directors; it is common knowledge that this has traditionally been a placeholder for sinecure to political supporters,”.

Urjit Patel’s book has released today. In this he has mostly dealt with the policy matters and the stability of the banking system.