Why India should have a new bad bank–economic times

Clipped from: https://economictimes.indiatimes.com/blogs/et-editorials/why-india-should-have-a-new-bad-bank/

The proposal for a new bad bank has been doing the rounds at least since 2018, but has stalled on the vital question of who would own it. There already are 20-odd private asset reconstruction companies, and these have been unable to buy bad loans off the banks on any large scale. Why assume that one more private bad bank would be any more effective? On the other hand, if the State sponsors the new bad bank, it would amount to a State-directed shuffling of bad assets from one State-owned entity to another, with no clarity on the pricing of deals. The solution is to create a bad bank sponsored by the major banks, public as well as private. If such a bad bank buys assets cheaper than normal, its profits would be larger than normal but would go back to the banks themselves, making it more palatable.

The name bad bank is deceptive. It should serve more as an asset management-cum-project execution agency, to resolve the bad loans it buys from banks. Many of the bad loans on bank books are inherently viable projects, given a haircut to reduce bloated project costs. Many real estate projects got stuck for want of liquidity from a market without a supplier of long-term project finance, real estate depending on non-banking financial companies that rolled over commercial paper to finance their short-term loans. Power projects are victims of states’ reluctance to force consumers to pay for the power they consume. For the Indian economy’s post-Covid recovery, politics has to stop patronising power theft and power giveaways, and a bond market has to be created, so that long-gestation projects can finance themselves with long-term bonds. If these conditions are met, a bad bank will become feasible.

Banks must be free to lend, for growth to pick up. Burdened as they would be with bad loans running to Rs 13-14 lakh crore post-Covid, banks will not lend, unless they can park their bad loans with someone without being accused of selling the assets off too cheap. A bad bank collectively owned by the banks in proportion to their bad loans would blunt the criticism. It must be given a chance.

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