Finance Ministry Exploring Possibility of Setting up a Bad Loan Bank

A committee has been formed to consider whether setting up an asset reconstruction company would be good for the banking system to ensure speedy resolution of public sector banks' bad loans.

New Delhi: The finance ministry has moved to explore the possibility of setting up an asset reconstruction company (ARC), or a bad bank, to ensure speedy resolution of public sector banks’ bad loans.

A committee has been formed under the chairmanship of Sunil Mehta, non-executive chairman of Punjab National Bank to examine the setting up of an ARC for faster resolution of stressed assets involving multiple public sector banks, Piyush Goyal, who currently holds the additional charge of the finance ministry in the absence of Arun Jaitley, told media during an interaction in Mumbai on June 8.

The committee will consider whether such an arrangement would be good for the banking system. If it is considered advisable, the panel will also consider the modalities by which such an ARC/AMC should be set up, Goyal further elaborated.

An ARC takes over bad loans from banks and financial institutions, usually at a discount, and works to recover them through a variety of measures, including the sale of assets or a turnaround steered by professional management. That allows banks to focus on their core activity of lending.

The idea of an ARC, or a bad loan bank, was first suggested by chief economic adviser Arvind Subramanian and had found support from RBI deputy governor Viral Acharya.

The idea of setting up a state-owned ARC or bad bank to deal with mounting NPAs is gaining traction and it needs to be created quickly, chief economic adviser (CEA) Arvind Subramanian had said while speaking at an event in February last year.

Making a case for an ARC, Subramanian had said, “You were already on the hooks (with bad loans) so not that bad bank is going to cost you more. Second, is RBI has already tried so many things including private ARCs, where is the solution.”

Previous NITI Aayog vice chairman Arvind Panagariya was against the idea of a bad bank. Jaitley too did not show interest in the suggestion.

 Goyal interacted with the media after his meeting with the chiefs of public sector banks.

The minister also informed that the Bank of Baroda chief Jayakumar will be formulating a strategy regarding PSBs taking over good loans of banks under the prompt corrective action (PCA) framework. He said that a consortium of banks would take over the good loans of banks under the PCA framework.

Goyal applauded SBI’s decision-making process regarding credit, which he said is transparent and speedy.

The finance minister said that he is given to understand that all the bankers are now wishing to set up such a mechanism which would enable faster resolution of stressed accounts in a transparent manner.

He also spoke of a proposal to have oversight committees that would bring in external expertise to facilitate faster decision-making in Indian banks.

PSBs are reeling under bad loans even as the RBI and the finance ministry prod them to expedite a resolution process.

According to a recent report from credit rating agency Crisil, as much as Rs 5 lakh crore of bank loans deteriorated into NPAs in 2017-18, taking the total slippages in the past three fiscals to Rs 13.6 lakh crore.

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