: India needs multiple bad banks to clean bank balance sheets: CII to govt #FinanceIndia #StockMarketNEWS India needs multiple bad banks to clean bank balance sheets: CII to govt New Delhi, Dec 22 (KNN)

@StockMarketNEWS Tue 22 Dec, 2020

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India needs multiple bad banks to clean bank balance sheets: CII to govt #FinanceIndia #StockMarketNEWS
India needs multiple bad banks to clean bank balance sheets: CII to govt New Delhi, Dec 22 (KNN) Confederation of Indian Industry (CII) has urged the government to consider creation of multiple bad banks to address the adverse impact of non-performing assets accumulated by public sector banks in the recent past, that got further accentuated during the pandemic.

CII, in its recently submitted pre-budget memorandum to the government has recommended that the government consider enabling Foreign Portfolio Investors (FPIs) and Alternative Investment Funds (AIFs) to purchase NPAs.

Explaining the rationale, Uday Kotak, President CII, said; “In the aftermath of Covid it is important to find a resolution mechanism through a market determined price discovery. With huge liquidity both globally and domestically multiple bad banks, can address this issue in a transparent manner and get the credit cycle back in action. ”

A robust market-based mechanism will encourage PSBs to sell their bad loans, without fear of questions being raised later. With cleaner balance sheets, PSBs should be able to raise capital from the market, obviating the need for re-capitalization by government, a bill which the government can ill afford to foot at this point of time.

The government has put in INR 80,000 crores in bank re-capitalization in FY 18, INR 108 crores in FY 19 and INR 70,000 crores in FY 20.

In September this year Parliament approved another INR 20,000 crores of capital infusion into PSBs.

Hitherto the NPAs have largely been sold to Asset Reconstruction Companies (ARCs). Due to the limited capital that ARCs have, many sales are made not on cash basis but on Security Receipts (SR). SR is an instrument wherein the payment is made only upon recovery which means that the sale price is not a ‘true sale’. Based on recent RBI data on outstanding SRs, industry estimates that the net recovery rate of ARCs is low and may be in the range of only around 10-12%. The outstanding SRs is Rs 1. 46 lakh crores. This represents the “non-cash” consideration received by banks against sale of loans.

The low recovery rates and the sale on the basis of SRs is not a very attractive proposition for banks. The best way to achieve true price discovery and better realizations is to open the buy side and enable a clear path for capital to flow for purchase of NPA.

The buy side could be opened by allowing Foreign Portfolio Investors (FPIs) and Alternative Investment Funds (AIFs) to purchase NPAs.

RBI has already contemplated this in a consultative paper wherein, it has proposed that regulated entities may be permitted to purchase NPAs.