The Centre’s move to finally set up the National Asset Reconstruction Corporation, colloquially dubbed a ‘bad bank’, is good news for India’s beleaguered banking sector, battling a rising tide of bad debts made worse by the disastrous impact of the pandemic-induced lockdowns on the economy. The NARCL, backed by about Rs 30,000 crore of sovereign guarantees offered by the Union government, will initially take over Rs 90,000 crore worth of bad loans that have already been provided for in their balance sheets by banks. It will offer 15 per cent of the value to banks as cash, and the others as tradeable security receipts. The pay-out will not be on the book value of the assets – banks will take a 80% to 90% haircut on these loans, but the fact that these loans have been fully provided for means that on paper, these loans are worthless; hence any cash is a bonus. In addition, if the NARCL manages to restructure these bad assets and sell them on to other investors, the value of the security receipts will rise, freeing up more money for the banks. With the NARCL eventually planning to acquire around Rs 2 lakh crore-worth of bad loans, out of the nearly Rs 9 lakh crore of the total bad loans in the system, banks will be freed up to pursue the remaining recoveries, as well as step up fresh lending with the freed-up resources, which should help boost growth.
On the downside, there is considerable risk that the ‘bad bank’ will simply become a repository of dud assets, unless it manages to restructure and sell the acquired assets. The experience with the Insolvency and Bankruptcy Code process, so far, is not encouraging, with very few resolutions actually reaching fruition. And without addressing the root cause of the bad loan mess – the poor lending practices in banks – the exercise may end up simply postponing the inevitable.
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