'Govt-owned bad bank more capital efficient'

Mumbai: Amid confusing reports about the control of the proposed bad bank, a brokerage has called for government ownership, saying state-funding is more capital efficient apart from speeding up implementation and also lowering the credit cost/loss for the banks.

The government owning the proposed bad bank will not only be more capital efficient but also not impact the fiscal numbers, as otherwise, it will have to keep on recapitalising the state-owned lenders as they will be the biggest beneficiaries of the proposed bad bank, Bank of America Securities India said in a report. Again, such a set-up can lower the credit charge on banks to a fifth in the worst-case scenario from the 100 per cent now, the report added. As of March 2020, the net non-performing loans of banks stood at 2.8 per cent or Rs 2,89,500 crore, which is 1.3 per cent of the GDP, according to the report.

This will go up considerably 13.5 per cent by this September, a two-decade high, given the impact of the pandemic on the companies and banks, according to the Reserve Bank of India. In January, a stress test by the central bank showed that public sector banks' gross NPAs might rise from 9.7 per cent in September 2020 to 16.2 per cent in September 2021, while private banks' from 4.6 per cent to 7.9 per cent, and foreign banks from 2.5 per cent to 5.4 per cent, taking the system-wide bad loans to 13.5 per cent by September this year.

The given understanding is that the proposed asset reconstruction company or ARC will be funded by state-owned banks/FIs. According to the report, the proposed ARC taking over the bad loans of banks presents an opportunity for improving asset quality when real lending rates are falling.