Page 37 - Banking Finance August 2021

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Y Toxic assets separation helps in generating some to both the Government and the Reserve Bank of India (RBI)
confidence among potential investors so that they can to set up a 'Bad Bank.' As per IBA estimates the 'Bad Bank'
then clearly examine the financial health of the lender. would require approximately Rs 10,000 crore of capital

Y Sour loans when transferred to a Bad Bank can help initially. The exact quantum of capital and amount of bad
loans to be housed in the proposed 'Bad Bank' would only
lenders prioritize their financing business and the
be finalized after discussions with the Government and
specialized institution deals with maximizing loan
Reserve Bank of India (RBI).
recovery.
Requirement of Bad Bank The 'Bad Bank' will be a 2 tiered
Y The high level of provisioning by public sector banks of structure.
their stressed assets calls for measures to clean up the Tier 1
bank books. An Asset Reconstruction Company Limited
Y There will be an Asset Reconstruction Company (ARC)
and Asset Management Company would be set up to
backed by the Government which would buy bad loans
consolidate and take over the existing stressed debt and from banks and issue Security Receipts to the Banks.
then manage and dispose of the assets to Alternate
Investment Funds and other potential investors for Y As per RBI guidelines, ARC will hold Security Receipts
eventual value realization. of 15%.
Y Banks will get 15% of the cash and will hold 85% of
Y Lockdown that was imposed due to pandemic to curb
covid spread has crimped the earnings of the businesses Security Receipts. Hence it is called 15:85 structures.
and individuals. It impaired their ability to repay loans Tier 2
which caused a hike in non-performing assets of banks.
The corporate sector has come under the debt of INR Y There will be an Asset Management Company (AMC).
15.52 lakh crore. Despite the regulatory forbearance Y AMC would be run by public and private bodies which
as a loan moratorium, borrowers are finding it difficult includes banks as well.
to service their loans. This then requires lenders to set Y Turnaround professionals.
aside their capital to cover such losses.
Y A Bad Bank can provide them with the freedom to How to make good assets with a 'Bad
restart lending. The RBI in its recent FSR informed that
the gross NPAs in the banking sector was expected to Bank
shoot up to 13.5% of advances by September 2021, from Y For faster recovery of bad loans, ARCs need to be made
7.5% in the previous year. more competitive by boosting their capital base through
consolidation while the economy is bouncing back, the
Y According to an estimate, non-performing assets
totaling Rs 899,803 crore will be transferred to the bad
bank. In the present pandemic-affected market, the RBI
has provided various relaxations to borrowers in the
form of an option to avail a loan moratorium or loan
restructuring. However, a similar relaxation has not
been provided to banks, who are expected to continue
to repay their obligations. Therefore, transfer of
stressed assets from a bank's books could provide banks
with the much-needed respite. Broadly speaking, banks
would be able to focus on lending instead of loan
recovery.

Bad Bank Structure (IBA) Proposal
Indian Banking Association (IBA) has submitted a proposal

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