“With reference to the budget announcement on the formation of a bad bank, IBA is working with the Department of Financial Services and a few lenders to set up the bad bank,” its 2-page communication to lenders states. “The process for identification of accounts which can be transferred to the proposed bad bank is being carried out.”
Banks have been asked to submit details of all non-performing loans in or outside consortium worth ₹500 crore and above. Lenders have been asked not to submit details of those accounts which are nearing resolution under the bankruptcy courts or are in the liquidation process.
Lenders have also been asked to exclude fraud accounts, unsecured bad loans and equity exposures. Banks will also have to submit details on provisions made against these accounts and the expected recovery on loan exposures.
In the Union Budget of February 1, finance minister Nirmala Sitharaman said an asset reconstruction company will be set up to take over stressed debt from banks, which will be sold to alternative investment funds and other vulture investors.
While the contours and the final structure of the bad bank are not final, the Reserve Bank of India governor Shaktikanta Das in a recent television interview indicated that the proposed asset reconstruction company will work within the present regulatory framework already in place for ARCs.
Several senior officials in the government have stated that the capital to set up the bad bank will come from lenders.
“A concerted approach by all banks to sell NPAs to the proposed ARC will speed up debt aggregation, the first step towards resolution,” said Hari Hara Mishra, director, UV ARC. “However, pricing of the NPAs may pose some challenge due to inter-creditor asymmetry in valuation and divergent security interests. The transfer price has to be realistic, realisable and market aligned to attract investors/buyers.”
As per the initial proposal of the IBA, the bad bank will have a two-tier structure where the government would own 100% with an investment of ₹10,500 crore.
A bad bank is expected to be a boon for public sector banks saddled with disproportionate share of the bad debt, restricting their ability to raise growth capital from the markets. “A separate bad bank, though late in the cycle, will ease up capital and management bandwidth to some extent and allow them to focus on growth, which in turn will arrest their market share loss to some extent,” said Anand Dama, analyst with Emkay Global. “Optically, better balance sheet will also improve their prospects for raising capital.”