SynopsisAccording to experts, systemic corporate stress is in the range of Rs 5-6 lakh crore, out of which Rs 4 lakh crore is with public sector banks.
MUMBAI: A bad bank could be a boon for public sector banks saddled with a disproportionate share of the bad debt, which is restricting their ability to raise growth capital from the markets, experts tracking the banking sector said.
The Union budget proposed an asset reconstruction company (ARC) to take over stressed debt from banks. However, with the government not allocating funds to capitalise the ARC, banks may be told to chip in to form the institution.
“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, a better balance sheet will also improve their prospects for raising capital.”
In all, 9.7% of loans by public sector banks have turned bad at the end of September 2020, against 4.6% at private banks and 2.5% at foreign banks. According to experts, systemic corporate stress is in the range of Rs 5-6 lakh crore, out of which Rs 4 lakh crore is with public sector banks.
Since large exposures have now aged and banks have improved their provision covers on such loans, they may not be willing to part with it at a highly discounted price. According to a study by Nomura, banks have eventually ended up writing off nearly 25% of their gross bad loans on an annualised basis.
This is in sync with the Reserve Bank of India (RBI) norms that mandate 100% provisions in four years for secured loans. Nomura believes that a bad bank structure may prove useful for the next asset quality cycle, assuming banks transfer the bad loans early in the cycle.
“We believe a ‘bad bank’ model may not achieve much in the current environment in which delinquencies are mostly coming from the consumer and small-ticket business loans and banks have been taking higher provisions against such bad loans,” wrote Nilanjan Karfa of Nomura Securities in a note.