Bad banks could be the essential vaccine to check the NPA crisis in the midst of a pandemic

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The Budget2021 hashtag refused to go extinct even a month after India’s finance minister gave a budget aimed at surviving and sustaining itself during the tumultuous phase of the pandemic. With every sector on hold getting insurance or help, one would expect the tablet’s statements to ripple. As far as the NBFC sector is concerned, the first giveaway of the goody bag came in the form of the founding of the restructuring and asset management company, or as it is commonly known, the bad banks. This decision was anticipated and expected because the credit market hit by the pandemic (and the moratorium) suffers from a huge wave of bad assets. Settling these disproportionate bad debts by selling them at market price is a possible way out to relieve the lending institution whose risk profile is threatened. Thus, the announcement of the creation of bad banks is important. The other announcement that the NBFC were eagerly awaiting was the reduction of the loan limit to smooth the recovery, from Rs 50 lakh to Rs 20 lakh, so that the SARFAESI law could be used (if necessary) to recover loans from defaulters. . . While this movement supports secured loans, it is a relief. The other big move came when digitization was supported by the proposal to incentivize digital payments. This move will help NBFCs and Fintechs not only to lend digitally, but also to obtain EMI payments digitally.

The question whether the threatening NPA will be helped by these announcements (and others) remains. The NPA crisis is a matter of great concern. Before the pandemic hit, estimated non-performing assets were 7.5% in September 2020, and the financial health of the economy was already worrying. But in the next four odd months, it doubled to surpass 14.8% – this data was shared by the Reserve Bank of India in its semi-annual Financial Stability Report (FSR). While it can be argued that the NPA may seem like a recurring monster on the economic scene, this needs to be curbed before it affects gross NPAs. This is where the bad banks could become the saviors.

Credit institutions are suffering from increasing delinquency. Borrowers (regardless of the size of their loan tickets) suffered either from unemployment or from wage cuts. Yes, the market is slowly and gradually opening up in terms of jobs, but the massive recovery required is still a bit far away. Banks have proposed restructuring loan repayment cycles in most cases so that collection can continue at lower capacity. This would help maintain the liquidity of the asset. This, however, might not be able to eliminate the need for failed banks. Contrary to the villainous name given to it, “faulty banks” are known as useful sponges throughout the world. Under the current circumstances, the balance sheet guarantee, the creation of a separate unit for overdue assets within the institution or the creation of a new entity by the credit institution itself are not the most suitable models. better suited; the need of the hour is a government-backed ad hoc entity (SPE).

All over the world, first world countries such as UK, France, Germany and other European countries used the bad bank strategy as they faced crises financial. For example, the creation of Retriva and Securum by McKinsey and Company helped Sweden through its 1992 banking crisis. The first case of handling a whopping 1.4 billion bad debts through the creation of Grant Street (the bad bank entity) by Mellon Bank in 1988 is the first known case of this debt resolution format. The success of the model lies in the fact that in 1995 not only was the mission accomplished, but the bondholders retained their profits even after the dissolution of Grant Street. It was another revolution that Pittsburgh saw.

On the Asian continent, the creation of the Indonesian Bank Restructuring Agency, or IBRA, was successful in avoiding the Asian banking crises of 1997-98.

On the Indian scene, we maintain our SPE suggestion, where the economic value of assets should be considered at the time of purchase. The proposal to recruit specialists from all industries should be followed until the establishment of the entity with minimal or no political influence to hinder the initiative. While the provisions of the backstop should be kept and maintained and legal and contractual hurdles should be ignored, it would be beneficial if the government retained a minority stake in the proposed bad banks. Here the idea of ​​’what’s in a name’ is just to be quoted because whatever bad bank’s name is, our interest is to see the financial health of the Indian economy restored.

Rishabh Goel is the co-founder and CEO of Credgenics.

As said to Rounak Gunjan.

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