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Rajan voices concern over Govt’s bad bank plan

With the government going ahead with the idea of creating a bad bank, Reserve Bank on Tuesday made its concerns clear on the ownership of such a vehicle to tide over the bad loan menace, saying the lenders should hold a minority stake in any stressed assets fund.

“In our view, majority ownership by banks is probably not wise or warranted. Perhaps, some form of minority ownership with a number of other players coming in, in addition to the government, to provide capacity, especially in management of stressed assets would be appropriate,” RBI Governor Raghuram Rajan told reporters.

The comments came amid a confirmation from the government that it was serious on setting up a stressed asset fund, which in the common parlance is called a bad bank, to take care of the bad assets. A bad bank, as is present in China for instance, buys up all bad loans from other banks.

Rajan has been critical of such an entity saying when banks themselves or government own such an entity it creates a moral hazard, enabling banks to continue with their reckless lending practices as they know that they will be bailed out one day by the system.

Unconfirmed reports said SBI will be leading to the $3-billion fund, which will also have investments from private equity funds and sovereign wealth funds, most probably from West Asia apart from the National Investment Fund. Rajan said the key issue for such a fund will be the issue of pricing, where both the bank selling a stressed asset and the fund buying into it find a common ground.

This is not the first time Rajan has expressed concerns over such an arrangement. In a previous episode when there were reports over the formation of a bad bank this February, he had raised question marks if a quasi-public entity will be able to solve the problems.It can be noted that bad loans crossed 13 per cent as of March with reported NPAs alone being over Rs 5.9 lakh crore.

Rajan explained there are a variety of stressed assets funds, which can include one giving debt support to stressed borrowers and also buying bad assets from banks. He said bulk of the work in this regard is being done by the government and RBI is only consulted on issues like its structure, ownership, etc.

The burgeoning bad assets in the system, coupled with the efficacy of the existing ARCs to deal with the situation either on capital constraints or lack of agreement on price, seem to be driving force for the formation of such a stressed asset fund by the government.

The overall bad assets including restructured assets and non-performing assets touched 13 per cent after an asset quality review by RBI, which asked banks to recognise 130 large corporate borrowers as bad loans. The apex bank is targeting to clean-up the bank balance sheets to represent their true nature by March. 

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