Page 7 - Banking Finance May 2020

RBI CORNER

RESERVE BANK

NEWS
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IBA submits proposal on Rajnish Kumar, who is also the chair- lakh crore during FY20 from Rs 16.79
man of IBA, has recently said that the lakh crore in FY19.
'bad bank' to Central lenders were toying with the idea of

Govt, Reserve Bank creating a bad bank to deal with In other words, the lack of demand for
credit has compelled banks to park sig-
The Indian Banks' Association has sub- stressed assets. Kumar said the time nificant amount of liquidity under the
mitted a proposal to the finance min- was right to set up a structure, along reverse repo window despite the cen-
istry and RBI to set up a 'bad bank' for the lines of a bad bank, given there are tral bank making it unattractive by
approximately Rs 75,000 crore worth adequate provisions for existing NPAs. slashing interest rate to 3.75 per cent
of non-performing assets (NPAs), Rating agency Crisil in its report had in March. Karthik Srinivasan, ICRA
sources told. A bad bank is a corporate projected gross NPAs of banks to rise group head (financial sector ratings),
structure which isolates risky assets by 150-200 basis points (bps) in the fi- said the sharp decline in incremental
held by banks at one place. "We are nancial year 2020-2021.
credit during FY20 was driven by slow-
requesting the government to provide ing economic growth as well as height-
Rs 10,000 crore of initial capital," the Banks deposit Rs 8.5 lakh ened risk aversion among lenders.
source added.
crore with RBI as under "Nonetheless, the expectations of in-
The proposed structure of a bad bank crease in incremental credit flow dur-
is based on the earlier recommenda- reverse repo window ing FY21 is driven by increased credit
tions of a panel headed by former PNB Banks have deposited a staggering Rs
demand amid weakening cash flows of
chairman Sunil Mehta, called 'Sashakt' 8.5 lakh crore under the RBI reverse
two years ago. repo window. The move comes days borrowers because of Covid-19 induced
after RBI Governor Shaktikanta Das stress, as well as capitalisation of inter-
According to sources, IBA has pro- est for the period of moratorium of-
urged bank chiefs to spur lending to
posed to set up asset reconstruction fered by lenders," Srinivasan said.
company (ARC), asset management both end customers and to non-bank-
company (AMC) and alternate Invest- ing financial companies and Meanwhile, on a weekly basis, the
ment Fund (AIF). ARC will be owned by microfinance institutions. growth in bank credit was largely
the government, but the AMC and AIF The rising amount of liquidity parked driven by lending to NBFCs and per-
will have participation from public as under the safe-mode reverse repo rate sonal loans. The combined incremen-
well as the private sector, as per the indicates the reason why bank credit tal contribution of these two segments
proposal. The Mehta Committee had growth has been off the mark. Accord- formed more than 80 per cent of the
earlier proposed to set up an AMC and ing to rating agency ICRA, the incre- overall incremental bank credit in
an AIF to resolve NPAs over Rs 500 mental credit flow from bank credit, FY20, coming from high base of 48 per
crore. bonds outstanding and commercial cent in FY19 over FY18.
State Bank of India (SBI) chairman paper declined by 64 per cent to Rs 6 "Overall growth in credit continues to

BANKING FINANCE | MAY | 2020 | 7