Bad Bank should be temporary: Former RBI Governor D Subbarao – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/finance/bad-bank-should-be-temporary-former-rbi-governor-d-subbarao/articleshow/86677725.cms?utm_source=ETTopNews&utm_medium=HPTN&utm_campaign=AL1&utm_content=23Synopsis

Subbarao noted that despite the pandemic, the bad loan situation may be somewhat better this year and banks should move quickly and dispose of these assets as they have been provided for. He spoke on the side lines of PHD Chamber of Commerce and Industry’s 116th annual session.

India’s recently set up bad bank should not be a permanent structure and wind up after it resolves the existing cases, former RBI governor D Subbarao told ET. Citing it as a moral hazard, Subbarao said this must be a one time experiment and a time frame should be set up for resolution of these cases.

“Once they resolve these cases it should be wound up, there should be a time frame, as it cannot be open ended because then it will be a moral hazard,” he said adding that this (bad bank) experiment should produce some good results but bold and quick decisions are important.

Last month, the cabinet had approved a guarantee of Rs 30,600 crore on the security receipts issued by the bad bank, National Asset Reconstruction Company Ltd. or NARCL, where state run financial institutions will hold 51% stake.

Subbarao noted that despite the pandemic, the bad loan situation may be somewhat better this year and banks should move quickly and dispose of these assets as they have been provided for. He spoke on the side lines of PHD Chamber of Commerce and Industry’s 116th annual session.

Under the proposed structure, NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, India Debt Resolution Company Ltd. (IDRCL) will be engaged for management and value addition. State run financial institutions will hold 49% stake in IDRCL.

The government will guarantee those SRs for a period of five years and the rate of fees which NARCL will pay to government for such guarantee will go on increasing, incentivising for speedy disposal of assets. The guarantee fee will be 0.25% and increase every year.

In a statement, the finance ministry had noted that NARCL proposes to acquire stressed assets of about Rs 2 Lakh crore in phases. In phase I, fully provisioned assets of about Rs 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II. NARCL will acquire these through 15% cash and 85% in security receipts (SRs). The government guarantee will be for the SRs issued.

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