BAD BANK

What has the Economic Survey recommended?  A Public Asset Rehabilitation Company (PARA) –also known as “BAD BANK” which would control the bad loans in the Indian banking system.   In India, there are many Asset Reconstruction Companies (ARCs).  So what is the difference with this introduction?  It is interesting indeed.  Let us see below:

• PARA will be much bigger in measure and Government equity will be quite substantial.
• Let apart, a large part of bad loans relates to valuable projects in infrastructure and related areas, and many such projects are required to be completed through further infusion of capital from promoters.
• Some of the debt has to be written off and some restructured to ensure viability.
• The existing ARCs are just not geared up for such a role, at least on the gage required since they recover by liquidating the assets.
• The Survey is of the opinion that leaving recovery to banks to resolve bad loans has not worked.
• At public sector banks (PSBs), management is unable to write off debt which may lead to investigation.
• Moreover, in many bad loans, several banks, public and private sectors, are involved which leads to difficulties in coordination.
• Also, Banks are not in a position to agree for write off in a given case.

HOW COULD TRANSFER TO PARA BE HELPFUL

1. Transferring some of the biggest bad loans to a well-capitalised PARA is expected to help in resolving the coordination problem.
2. Since the government stake in PARA will be 49 per cent, managers are expected to resolve loans without subjecting it to a possible scrutiny.
3. This sounds fine —until you get down to the details.

ISSUES FACED:

Also, there are some issues expected to be faced:

• One challenge is the prices at which bad loans will be sold to PARA.
• Determining the market prices for bad loans is not easy.
• Getting banks to agree on a sale price could end up in coordination issues.
• If, sale of bad loans to PARA is alleged to be under-priced, PSB management would be exposed to the ire of the CAG, CVC and CBI.
• Overpricing again would agonize the private investors in the proposed PARA.

Hence, the challenge of writing off debt remains.

Further the Survey mentions that the Banks Board Bureau has created such a mechanism and whether it is operational is not clear.   It is envisaged that  it is necessary to strengthen the mechanism by getting one created through an Act of Parliament.

In total, it is not clear that setting up a new agency is gainful to clear the issues well before.  Giving PSB management statutory backing to resolve bad loans and the capital infusion to cover write-offs could achieve superior outcomes.  However, experts feel that there is merit in trying out competing model per se.  The current options are:  Bring better resolution under the present system and set up PARA and also transfer loans amount to Rs. 1 lakh crore therein.  Let us see how it works???