Budget 2021: Bad bank will be a win-win for lenders

All banks are eligible for privatisation. A committee of secretaries will decide which banks will be privatised, says Financial Services Secretary Debasish Panda.

The asset reconstruction and asset management company will help in resolution of stressed assets worth Rs 2.25 trillion, financial services secretary Debasish Panda said in a post-Budget interaction with the media.

On 'bad bank’

Though commonly known as a bad bank, it is neither bad nor a bank.

It’s an ARC-AMC model.

If Rs 2.25 trillion worth of stressed assets are sold off through it, then money can be realised and reflect on banks’ balance sheet.

The idea was proposed by the Indian Banks’ Association, and the government decided such an institution was needed as the country grapples with a pandemic.

There are currently three-four ARCs that have the capacity to resolve about 70 assets worth over Rs 500 crore.

The ARC would be set up by both public and private banks, and the government will not hold any equity in it.

Banks will be able to transfer their assets to the ARC at net book value (value of asset-provisioning done).

About 15 per cent would be cash deals and 85 per cent through security receipts.

It would be a cash-neutral deal for banks.

The regulator may require some provisioning for this arrangement, for which the banks may request the government for some guarantee which may satisfy the regulator.

Then, the asset management company with a set of experienced professionals will operate the asset for some time, find an investor or an AIF through which it can be disposed through market price discovery mechanism.

It will be a win-win for all banks in terms of getting their money back.

Privatisation of banks

All banks are eligible for privatisation.

A committee of secretaries will decide which banks will be privatised.

Legislative changes will be done to enable this.

The NITI Aayog would first examine the companies that can be privatised, and the proposal will be considered by Core Group of Secretaries, and finally a decision will be taken by the Alternate Mechanism.

Recapitalising banks

The pending allocation of about Rs 14,000 crore would be enough to capitalise PSBs in the current financial year.

Banks have already raised about Rs 51,000 crore from the market, and are expected to raise another Rs 8,000-10,000 crore this year.

Based on inputs received from banks, they have made enough provisions already anticipating Covid-19 stress.

They have also factored in stress due to Supreme Court’s interim ban on recognising NPAs.

Development Finance Institution

Infra financing needs patient capital and is still at a nascent stage.

It was prudent to have a sovereign-backed institution that will give confidence to investors such as sovereign wealth and pension funds.

Having one institution will help in playing the role of a facilitator.

It will be a market maker and play very active role in nurturing the bond market.

Real-time monitoring of projects will also be done in its developmental role.

For a quick start, the government may consider subsuming IIFCL with the DFI as they have domain expertise and trained manpower.

It is expected to start the post-Covid investment cycle and anchor National Infrastructure Pipeline.