Union Budget 2021: Bad bank move will quicken NPA resolution

Mumbai: Both bankers as well as distressed asset managers have welcomed the finance minister’s announcement of setting up a bad bank to deal with the high level of toxic loans in the system.

Though no details are available on how much capital the government plans to allocate to this new asset reconstruction company, bankers welcomed the move as a step in the right direction as it will help in quicker resolution of non performing assets (NPAs).

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“It will expedite the resolution of bad assets. Taking over the bad loans reduces the provisioning requirements and enhances the ability of the banks to lend to the productive sectors of the economy to spur growth,” said Indian Banks’ Association (IBA) chairman and

CEO Rajkiran Rai.

The IBA along other corporate lobby group have been suggesting the creation of a bad bank for a long time. These calls again gained momentum due to the economics disruption caused by the Covid 19 pandemic which has led to a spike in bank NPAs.

In her budget speech finance minister Nirmala Sitharaman said a asset reconstruction company (ARC) will be set up to consolidate and take over the existing stressed debt from banks to dispose them off to alternate investment funds (AIFs) and other potential investors later.

At a post budget press conference Sitharaman said the government plans to set up a holding company to which banks can transfer their stressed loans which can be sold at a market determined price later.

“In Covid parlance, this is like setting up a jumbo quarantine centre for NPAs. However, for treatment it will require a large number of ventilators, which effectively are distressed debt funds with risk appetite to acquire these NPAs. Vaccine, or permanent cure, of course, lies in enhancing underwriting skills, and oversight mechanism to arrest deterioration of credit quality,” said Hari Hara Mishra, director at UV ARC.

The finance minister said that setting up of a bad bank will reduce provisioning pressures for public sector banks and help clean up their books.