Mulling over the idea of a bad bank may not work. Why?? The Government has announced to sep up a committee under Punjab National Bank non executive Chairman Sunil Mehta to give necessary recommendations on forming of an ARC for faster resolution of Stressed Assets in banks. Let us understand the following:
- Let a resolution be sought by transferring NPAs to an Asset Reconstruction Company. Is it possible for the Government to ensure that provisions of Insolvency and Bankruptcy Code (IBC) will not come in the way of future resolution?
- It is seen that Grant Street National Bank which took over Mellon Bank’s Bad loans in 1988, the Resolution Trust Corporation of US set up in 2989 to deal with savings and loan crisis, the Arsenal and Sponda ARCs in Finaland in 2990s took over bad mortgage-backed housing loans of two collapsed banks and several others, have been the successful ARCs across.
- Mortgage loans or Housing Loans are ofcourse comfortable portfolios to handle. Just put them in to various baskets of risk weighted portfolios and segregate them and follow up. Just study them along with the business cycle and accordingly reschedule the loan.
- Now coming to our bad loans portfolio, are they dealing with Housing Mortgages? Absolutely not. Our loans are complex loans comprising Collateralized Corporate Assets which involve several banks under consortium. Also, these are the finances extended to large industrial or infrastructural projects which would be difficult to recover since they may not become feasible for restructuring under Bankruptcy Law or through Liquidation process or even by transferring them to the Bad Bank. The real problem arises in segregating them into saleable and non-saleable lots. This is evident from the bad resolutions of Corporate Loans, in Mexico, Brazil, Argentina, Greece, Turkey, South Korea, Thailand, Malaysia, Indonesia and lastly India, where they have miserably failed.
- A buyer who bids for a bad loan is not going to pay the same amount and would certainly ask for a discount which in turn would result in the loss being reflected in the Balance Sheet.
- Another important notable point is Article 12 of Constitution reads that the PSU Banks are part of the State and hence would be subject to the inquiry by the Parliament, the Central Vigilance Commission (CVC) and also Central Bureau of Investigation (CBI). This means, a loan sold below its book value will be questioned by these committees and authorities and hence the Bank Executives may not be prepared to answer these people and thus may avoid taking up such proposals.
- Another aspect to be seen is that though the ARCs would be a Government Controlled body, it would be Private Personnel who would actually run these ARCs. These persons should be specially trained people and should not be PSU Bankers. Making PSU bank officials again under the BAD BANK would only mean that the people who took initiative in sanctioning such loans are now in another form to restructure and down sell the loans which would be ridiculous indeed.
A bad bank is a corporate structure to isolate illiquid and high risk assets held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. Under these circumstances, the bank may wish to segregate its “good” assets from its “bad” assets through the creation of a bad bank.