The idea that bankers will infuse capital in the formation of the bad bank is not a very good plan, stated the panelists at the ‘The Future of Banking’ webinar series. The second session in this series on how to deal with NPAs (non-performing assets).
The panellists for the session were former managing director of ARCIL, Vinayak Bahuguna and ApnaLoan co-founder and Investment Adviser at Fee Only Investment Advisers, Harsh Roongta.
Responding to the query about reports that private and public sector banks were going to fund the proposed bad bank (which would hold all the NPAs), Bahuguna said, “I do not see the merit (in having banks infuse funds in bad banks).”
He added the best way to raise funds would have been allowing market forces to decide the value of the (non-performing) assets they held. By investing in the bad bank, the banks especially public banks are not going to free capital for giving out loans. Instead, they will tie-up capital in an area that is not their core expertise. “My initial thoughts are that it is not the bank's core competency and it is not where capital should be deployed.”
Calling the NPAs or bad loans a “mess”, Harsh Roongta stated, “There is a mess that is created due to well-known reasons. Now, you want to transfer the mess to somebody else and you also want to finance that somebody else. How is it a transfer?.”
In addition, the panellists stated that if these assets are transferred and priced at values that are real, then the bad bank would find investors as well. They’ve probably been priced higher than what investors are willing to pay. That could mean why the capital is not coming from investors, but being forced out from the banks themselves.
At present, bad loans will change hands but will continue to lie with banks. “On one hand, you are saying that you want to kick start the economy and you need more loans/ capital. On the other hand, you are saying that you are putting capital here (bad bank) and I do not know how long that will take to unravel, which is very counter intuitive,” Bahuguna stated.
Bahuguna, who is a stern supporter of the bad bank concept, now feels the proposed structure is unwieldy.
Yet another fear about the bad bank is the time frame around it. Over two decades back, IDBI had a small unit called SASF. “ It has been 20 years since and it has been lost from public memory. We do not know how they fared. They still have loans from 20 years ago.”
The panellists also stated the bank’s talent to manage loans and value them is very limited. It takes a lot of bandwidth of very senior people to do this. Many of them will be facing it (NPAs) for the first time. Roongta added that the need for skills in this space is crucial.
Meanwhile, Roongta stated that instead of just focusing on large loans, it is time to pay attention to small, retail loans which may be in trouble in the future. Even after so many years, he added the way bankers treat retail customers have not changed. He explained that the small businessmen were at the bottom of the credit pyramid. But nobody cares for him, about restructuring his loans, or even offering him flexible interest rates if he has serviced his past loans well.
Bahuguna confirms this, stating that India’s approach to loans and lending has not changed. He added that reasonable business has a chance to grow if the right support is provided. Talking about NPAs in India, he said that in India interest rate is higher than in the rest of the world. “Our leverages are higher than the rest of the world. Why will we not expect our defaults to be higher than the rest of the world as well?”