Creation of ‘good bank’ as important as ‘bad bank’ for NPA management

NARCL along with a development financial institution or development bank can help address both stock and flow of NPAs in banking

Hari Hara Mishra | September 20, 2021


#good bank   #bad bank   #NARCL   #NPA   #finance   #Banking   #infrastructure   #finance ministry  
Finance minister Nirmala Sitharaman (File photo) announced the cabinet had cleared the `bad bank` proposal last week.
Finance minister Nirmala Sitharaman (File photo) announced the cabinet had cleared the `bad bank` proposal last week.

After the recent announcement of the government guarantee for Security Receipts (SRs) to be issued by a public sector-owned National Asset Reconstruction Company Ltd (NARCL), there is a surge of interest around this desi version of a super bad bank. The entity will acquire around ₹2 trillion bad debts from banks (which is around 25% of estimated ₹8.34 trillion of bad debts outstanding as of March 2021). From the immediate balance-sheet perspective of the banks, it is a big positive. Since most of the lenders will be doing it simultaneously, debt aggregation which used be a challenge and faced delayed resolution, gets addressed. The assets so acquired will be managed by a private sector professional entity called India Debt Resolution Corporation Ltd (IDRCL). Public sector ARC, private sector professional management and add backstop support of government guaranteeing the redemption of the payments notes issued by NARCL called SRs, everybody is gung-ho. And to a considerable extent, rightly so.

Also read:
All you wanted to know about 'bad bank'

Let us dive a little deeper. NARCL is a one-time exercise to acquire ₹2 trillion debt and resolve it in a five-year time frame. The entity will flush out NPAs of ₹2 trillion from banking system . Is it unique? Well, as per RBI data, the existing ARCs had acquired debts with book value of ₹2.38 trillion as of June 2016 which went up to ₹4.31 trillion as on 2020. In other words, in the last four years existing ARCs did flush out around ₹2 trillion from the banking system. It was not one time and hence there was no big- bang around it. For acquiring  this nearly ₹2 trillion NPAs, ARCs issued SRs amounting ₹0.72 trillion, at an average pricing of 36%. The cash component paid upfront by ARCs in this was ₹0.18 trillion, i.e., 25% of purchase consideration. NARCL proposes to acquire the assets at an average pricing of 18% with 15% upfront cash. NARCL does get a headstart with aggregated debt acquisition and much greater access to distressed debt market with government guaranteed papers. However, the creation of two entities, NARCL and IDRCL, may have its own issues around duality in structure.

Now the more pertinent question. NPA is both a stock at any given time and flow during a period. Flow is determined by net NPA accretion reduced by the amount recovered. NARCL or the existing ARCs help in reducing stock. What about flow? Just to give a perspective, in a three-year time-frame, from 2017-18 to 2019-20, banks added NPAs of ₹12.97 trillion, recovered ₹4.64 trillion and wrote off ₹6.37 trillion. During 2020-21, there would have been expected improvement which can be analysed after the ‘Trend and Progress of Banking’ report 2021 is available.

The fact remains that the flow of NPAs, and accretion of fresh NPAs is an equal, if not bigger, problem vis-à-vis the problem of NPA stocks. NARCL takes care of latter. But equal focus has to be on ensuring that incremental flow is addressed possibly by improving credit underwriting, may be with  an aggregated due diligence and documentation for parity in  rigour of skillsets in credit origination and follow-up.

Budget 2021 also mentioned setting up of a ‘good bank’, a development financial institution (DFI) for the funding of the national infrastructure pipeline. An amount of ₹20,000 crore has been budgeted this year. The problem of NPAs in banks is very much contributed by weathering out of all DFIs like ICICI, IDBI and IFCI, and the result was that the banks with short-term liability had to invest in long-term project loans with additional regulatory and execution risks. Once that is taken care of, hopefully NPA accretion will come down.

A ‘bad bank’ (NARCL) complemented with a ‘good bank’ (DFI) can help address both the stock and flow of NPAs in banking.

Mishra is a policy analyst and columnist.

Comments

 

Other News

Many roles of civil society during pandemic

The union government enforced a nationwide lockdown on March 25, 2020 to curb the spread of coronavirus as it was causing large-scale infection and disease. Challenges of pandemic management and levels of distress were revealed during this time. The fear of Covid spread like wildfire and a

Thackeray launches three fast-track DNA units under Nirbhaya scheme

Maharashtra chief minister Uddhav Thackeray has launched three state-of-the-art human DNA units under the Nirbhaya Scheme for efficiency in criminal investigations. A wildlife DNA unit in Nagpur makes Maharashtra the country’s first state to have a forensic testing lab for animals.  

How foreign policy has been Modi’s focus right from the start

The Midway Battle: Modi’s Roller-coaster Second Term By Gautam Chintamani Bloomsbury / 400 pages / Rs 699 Gautam Chintamani, a film historian and author, has penned an in-depth chronicle of prime minister Narendra Modi’s second

Remove unauthorized constructions without pressure: Thackeray to BMC

Maharashtra chief minister Uddhav Thackeray has instructed the Mumbai civic authorities to take immediate action on unauthorized constructions on war footing. In a virtual meeting held on Wednesday, Thackeray said no illegal construction will be tolerated in Mumbai and called upon the BMC to

Covid norms relaxed; Mumbai restaurants, shops to remain open longer

After extending timings of shops and restaurants as well as the reopening of cinema halls and theatres under specified SOPs from October 22, in view of the festive cheer, the Maharashtra government has allowed restaurants and eateries to remain open till 12AM and shops and establishments to function till 1

Global Hunger Index data collection flawed: Arvind Panagariya

Rubbishing the recently released Global Hunger Index 2021, wherein India has slipped to 101 position to be placed below Pakistan, Nepal and Bangladesh, Arvind Panagariya, professor of economics at Columbia University and former vice chairman, NITI Aayog, has said that data collection and methodologies used

Visionary Talk with Dr Arvind Panagariya, Professor, Columbia University & Former VC, NITI Aayog



Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter