RBI open to idea of ‘bad bank’ if there is a proposal

Reserve Bank of India

The Reserve Bank of India (RBI) was open to the idea of a bad bank if there were to be a proposal, central bank governor Shaktikanta Das said on January 16.

Indian economy is likely to contract to 7.5 per cent

“If there is a proposal to set up a bad bank, the RBI will look at it,” Das said during a question and answer session at the 39th Palkhivala Memorial Lecture.

“We have regulatory guidelines for ARCs. We are open to look at any proposal to set up a bad bank. If any proposal comes, we are open to examine it,” Das said.

Das added that it was for the government and private sector players to plan for a bad bank.

A bad bank bundles together all the bad assets in the banking industry, buys it at a discounted price from banks and tries to find buyers by putting a turnaround plan in place. The purpose of creation of a bad bank is not very different from a typical asset reconstruction company (ARC).

will invest in the proposed bad bank initially, while in due course, banks and outside investors will pool in money. The creation of a bad bank supported by the government and industry was being pitched as a critical banking reform in Asia’s third-largest economy

The idea of a bad bank is not new. In 2018, the government had announced a plan for PSBs called ‘Project Sashakt’, which had a five-point plan for bad-loan resolution in public sector banks.

The government then spoke of a model, with the guiding principles of an AMC resolution approach, under which an independent AMC would be set up to focus on asset turnaround, job creation and protection. The company would be aligned with Insolvency and Bankruptcy Code (IBC) process and IBC laws, the government had said.

The government did not call it a bad bank then and made it clear that it won’t get involved in the bad-asset resolution process which would be led by banks. With this, an alternative investment fund (AIF)-based resolution approach for loans above Rs 500 crore was also discussed under which an AIF would raise funds from institutional investors. Banks, too, would have had an option to participate, if they wish to participate on the upside. The idea could not be executed for various reasons.

The talk about ‘bad bank’ is similar to ‘Project Sashakt’ but in a different avatar. The idea is good and more workable now since banks have already made 70-80 percent provisions on the NPAs after the mega clean-up exercise, experts say.

Domestic equity markets began Friday’s trading session flat