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If a bad bank wants to succeed, it need a healthy NPA market

Posted Date: 17-08-2021 Posted By: user

The scenario of Non-Performing Assets or NPA is certainly not good. According to the report published by the RBI, the gross NPA of the banking sector may increase up to 15 percent by the end of this financial year. It is a 20-years high.

No wonder, the government is enforcing more stringent mechanisms to handle npa account settlement. It has been well aware of the problem. The IBC (Insolvency and Bankruptcy Code) has been modified and interpreted to respond to the needs of sick companies.

The npa debt settlement process will be further strengthened to handle the situation.

It needs multiple efforts to resolve the issue

Is the resolution of bad debt the only remedy? No, the problem has multiple layers, and the resolution has to be multilayered.

A large proportion of bad debt is contributed by big-ticket companies. It is a messy business to resolve the claims of creditors of such companies. It requires high expertise in legal and commercial matters. A regular offtake of NPA in smaller amounts would be the best idea.

To help in faster npa account settlement, there have been ARCs created. These Asset Reconstruction Companies are considered a prime vehicle to scrutinize the debt. They are allowed to buy NPA in the form of cash and securities.

The percentage of securities used to pay the bank represents the share of the risk borne by the bank even after it sells the NPA.

As of now, the assets under ARC are around 1.5 Trillion, which is more than 14 percent of the stock of NPA. The growth rate of assets managed by ARS has reduced in 2019. Also, the investors added after 2018-19 are foreign portfolio investors. They are capable of raising funds overseas at the lower interest rates.

There was a suggestion to form a“bad bank” to deal with the problem. Still, the definition of a bad bank is not clear. However, it looks that it will be an ARC for which the capital will be given by the government. It will be aligned to commercial considerations. Additional capital within the boundaries of fiscal properties is welcome.

For the success of a bad bank, it is a necessary precondition that private capital operates at reasonable risk.

To allow it to happen, banks will have to take on certain levels of risk. They cannot transfer everything to the buyer.  Also, new sources of domestic capital must be encouraged to participate.