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Banks appear to be gearing up for a surge in bad loans soon. At the moment, the extent of the damage triggered by the pandemic and lockdowns is not clear as even the bankruptcy code’s operation has been suspended. The government too appears to be readying for a surge in bad loans. Consequently, finance ministry officials have said that they are considering many options, including a new bad bank which may be floated by the government.
In this context, it is important to note that India has private sector bad banks which are termed as Asset Reconstruction Companies (ARCs). The root of the problem in India is that bad banks are in the private sector and the bulk of the bad loans are in the public sector banks. When a public sector bank sells its bad loans it naturally has to be at a discount. Public sector bankers are reluctant to carry out transactions as a commercial transaction can lead to subsequent investigation by the government’s vigilance department or one of the enforcement agencies.
Instead of floating a new bad bank the government should free public sector bankers of constraints while taking commercial decisions. This should be followed by the government selling its stake as state ownership of banks is no longer justified.