The government of India is reportedly considering setting up a bad bank as the country explores all possible options to improve the banking sector. This is according to a statement credited to Tarun Bajaj, the country’s Economic Affairs Secretary.
“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.
The statement came in response to a question on whether the government would consider setting up of a bad bank to reduce the burden of Non-Performing Assets (NPAs) of the public sector banks.
The idea of setting up a bad bank has been a subject of controversy in recent times. In June, Chief Economic Adviser K V Subramanian stated that the idea may not be an effective option for addressing the non-performing asset woes in the banking sector.
“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 aspectaffecting 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 ,” KV said.
Banks in India currency sell bad loans to ARCs as per the prudent norms of the Reserve Bank of India
President UdayKotak of CII has also expressed his perception about setting up of a bad bank. Uday stated that the idea is not the ideal solution to the problem of mounting NPAs and will yield no results until major issues like transparency and recovery rate are addressed.
Former RBI Governor, D Subbarao, however, has a different opinion, stressing that the idea was not only necessary but unavoidable considering the present circumstances with NPAs.
Tarun Bajaj recently stated that the government has announced 100% guarantee for the smaller industries to allow banks lend to them.
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