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Bad Bank Will Not Fix Toxic Pile, Alleviate Some Pain: Jaya Vaidhyanathan

During her address on September 16, the Finance Minister also said the government has addressed many issues faced by the banking sector.

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Amid the ongoing economic crisis, the Union Finance Minister Nirmala Sitharaman a few days ago announced the setting up of a ‘bad bank’, which the PM Modi-led Centre government had earlier proposed in its 2021-22 Union budget.  

During her address on September 16, the Finance Minister also said the government has addressed many issues faced by the banking sector. 

Jaya Vaidhyanathan, CEO, BCT Digital said, "I see the Finance Minister’s roadmap on bad banks as a welcome move. The Rs.30,600 crore government guarantee for security receipts issued by NARCL will be instrumental in improving recoverability. Eventually, this will be a pivotal factor in ensuring banks’ balance sheets are in good shape. Most critically, with NARCL posing as a bidder, individual ARCs will be obliged to bid for loans at competitive rates, faster, curbing extremely low buyouts, and circumventing delays. The fact that the ownership of NARCL is a joint PSB-private partnership elevates optimism and leaves expectations of recovery high. I also expect the involvement of the India Debt Resolution Company to expedite and add value to the entire process."

Vaidhyanathan also talked about how two-tiered bad bank structure, as proposed by India’s Finance Minister Nirmala Sitharaman, involves the National Asset Reconstruction Company Limited (NARCL) and India Debt Management Company (IDMCL), which are asset reconstruction and management companies, respectively. 

She said, "This is poised to be an effective framework as NARCL will function as a debt aggregator and IDMCL will work towards resolution of bad assets. The Rs. 30,600 crore government guarantee for security receipts issued by NARCL for five years will be instrumental in improving recoverability. Eventually, this will be a pivotal factor in ensuring banks’ balance sheets are in good shape Further, with NARCL posing as a bidder, individual ARCs will be obliged to bid for loans at competitive rates, faster, curbing extremely low buyouts and circumventing delays. Also, the ownership of NARCL being a joint PSB-private partnership elevates optimism and leaves expectations of recovery high. The involvement of IDMCL is expected to expedite and add value to the entire process of asset resolution, as well. The bad bank will not “fix” the toxic pile but will alleviate some of the pain."

The institution of bad bank structure is a well-timed move considering the circumstances where demand is picking up and the economy is bouncing back. A bad bank with participation from existing banks in terms of ownership as well as specialized project appraisal and recovery skills will certainly benefit India's ailing banking system, Vaidhyanathan mentioned. 

"The potential payoffs are huge as a higher recovery rate by the bad bank would translate to higher profits to the owners and ultimately, the banks themselves. That being said, the success of a bad bank will rely on the individual efficiencies of its two cornerstones – the NARCL and IDMCL – and their ability to expedite and effect closure and most importantly the value addition it entails," Vaidhyanathan added. 


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finance minister nirmala sitharaman