bad bank: the stages of good, bad and agla: it seems that there is only one way for the bad bank of India to operate
The deliberations over the past year and the subsequent approval by the GoI have created an atmosphere of high expectations that the bad bank will become the final solution for troubled banks and nervous bankers. But will it live up to expectations?
Not if its leaders fail to escape the hangover of their long stints in state-controlled banks and continue to be dogged by old fears that haunt PSB CEOs long after they retire. Not if they are unable to accept innovative solutions for faster resolution of bad debts. And, certainly not if bureaucrats with only a sketchy understanding of banking and the asset market are under stress.
Such risks exist. PSBs, by regulation, will have majority control in NARCL, which, in addition to choosing which loans to buy, may also end up having a big (if not binding) word on what to do with the loans it acquires. . The resolution process, however, would be led by a separate entity – India Debt Resolution Co Ltd (IDRCL) – in which private sector institutions would hold 51% of the capital. But it is not clear whether the IDRCL, majority owned by private interests, would serve as a simple service company or would be allowed to enter into agreements independently to redress a defaulting company, change the management of a borrower by delinquency, dispose of assets or agree to a loan discount. without the consent and approval of NARCL.
If the resolution arm does not have the freedom and flexibility to choose the resolution path, there is very little sense in forming a company separate from the private sector. The success of any Asset Reconstruction Company (ARC) depends on purchasing the right loans at the right price from banks and finding a meaningful solution.
Where does the ARC run
The failing bank will have an advantage over other CRAs. It can use its influence, government support, and relatively well-capitalized balance sheet to purchase loans from multiple banks exposed to a failing company. This loan aggregation, which other CRAs often take a long time to complete, would give NARCL some advantage.
In addition, PSBs would be less reluctant to deal with an organization in which their peers have a substantial stake and would be more willing to accept SRs that are at least partially guaranteed by the government. What comes next is the hardest job: making the most of the bad loans that are purchased. A CRA can choose several ways to deal with it: settle with the borrower, reschedule debts, sell assets, bring in new managers, or initiate the safer, less controversial (but longer and not necessarily the optimal solution) solution. to initiate bankruptcy proceedings.
Much of the Rs 92,000 crore loans that banks would sell are old non-performing assets (NPAs) that have been fully or adequately provided by lenders, and where the value of underlying collateral like plant, machinery and other assets may have eroded considerably. Solving such cases would require innovative, even aggressive, faster and possibly the best solutions, given the specifics of each case. But such solutions would usually escape policymakers operating within a PSB bubble with all its usual conventions and concerns.
Making a deal with existing management, bringing in a private equity investor, delivering a higher return to a stress or hedge fund that infuses funds, and increasing more debt to bet on a turnaround may not be things. immediate options for them.
The RBI may not easily view the two entities – an ARC PSU and a private sector debt manager – as one platform, or let NARCL outsource executive decisions on resolutions to the IDRCL (which, although labeled with an ARC, is not an ARC).
Don’t replay paperwork
Maybe the regulator should think outside the box and jump in to allow NARCL and IDRCL to sign a contractual relationship for meaningful resolutions. Otherwise, the two companies could end up blaming each other when a resolution backfires: with the IDRCL pointing the finger at the bad bank for overpaying on loans and the bad bank punching holes in the bank. resolution strategy.
Bad bank shouldn’t be a one-time job to clean up the bank books. Loans will increase, new bad loans will settle in, and the banks’ appetite for capital will never cease. Unless the bad bank gets rid of the pitfalls of the PSU and its managers are encouraged to move forward with realistic and optimal resolutions, the wheels will stop moving after a few years. Having finally recognized the need for a bad bank, the government should keep it safe from bureaucrats.
