Many operational details need to be thrashed out before the “bad bank” gets started
With borrowers likely to take a renewed hit on incomes from Covid’s second wave, banks that were just beginning to lighten their burden of non-performing assets (NPAs), look set to face a fresh round of defaults which could spike NPAs to double digits. This would once again set off a vicious cycle of loan losses, capital shortfalls and risk aversion at banks. Timely intervention to relieve banks of their legacy bad loans therefore appears imperative now for credit flow to resume when the pandemic abates. The Centre and the banking industry thus need to act quickly to operationalise the ‘bad bank’ idea debated since the Budget. The formation of NARCL (National Asset Reconstruction Company Ltd) and appointment of its CEO mark only baby steps and there are many operational details to be thrashed out if NARCL is to prove more successful than the scores of existing Asset Reconstruction Companies (ARCs).
There has also been very little discussion around how NARCL will manage a better recovery record than existing ARCs, which have recovered just 25-35 per cent of loan amounts and have struggled to repossess assets or enforce collateral. For NARCL to do better, legal roadblocks in the way of recovery actions need to be cleared. To pre-empt moral hazard from the Centre repeatedly stepping in to bail out banks, it should also take RBI’s advice and set out a specific mandate and timeline, after fulfilling which the NARCL will be wound up.