By Parush Arora
The menace of stressed assets over the banks has sustained too long opposed to the anticipation of the governing bodies. This toxicity is ruining the balance sheets of banks. Its valuation looks like a mammoth task to many. Indian banks had recorded stressed loans of $133 billion, or 12.34% of their total loans, on September 2016.
According to Reserve Bank of India, about two dozen state-owned lenders have an even higher stressed-loan ratio of 15.88%. These lenders own nearly 70% of India’s banking assets.
The current scenario demanded of the apex bank the introduction of some stress relief scheme for the banks.
What is a bad bank?
On Wednesday, the RBI Deputy Governor, Viral Acharya encouraged the introduction of bad banks. He gave a statement that it could act as a cleanser for bank balance sheets if designed properly. Bad banks are entities which will buy stressed assets from the banks under hazard. They will deal with them like converting debts into equities in order to sell them to investors. Now the key lies in the proper valuation of these assets and propelling the investors to participate. The preceding governors view is slightly against the concept. However, RBI is looking firm to stay open to all the options available in order to deal with the situation.
State-owned lender Punjab National Bank (PNB) on Wednesday reported a record Rs.5,367 crore net loss for the quarter ended March 2016. | Photo Courtesy: GoShoppinA possible structure
The concept of bad banks is quite straightforward.
It focuses on dividing the assets into good and bad. However, its implementation seems complicated.
It is yet to decide whether to keep the stressed assets on or off the bank’s balance statement. Removing them will provide transparency into bank’s core operations. It is also good for investors but is costly and complicated. The management of assets by bank entities or a special purpose vehicle is still a query.
Previous attempts at reviving assets
In the past, RBI came up with the scheme of strategic debt restructuring (SDR). Under this scheme, the change of management is initiated as a part of the restructuring of stressed assets. This is done to ensure that the shareholders bear the first loss rather than the debt holders.
[su_pullquote]RBI suggests a transfer of equity shares of the company by promoters to lenders to compensate for their sacrifices.[/su_pullquote]
RBI suggests a transfer of equity shares of the company by promoters to lenders to compensate for their sacrifices. But the banks have invoked the provisions of SDR in at least 21 cases. Of these, they have closed out only two. The reason behind this has been the lack of investors. In June, the Central Bank introduced S4A (Scheme for Sustainable Structuring of Stressed Assets) as another option for banks to counter toxic assets.
Under S4A, banks can convert up to 50% of a companys loans into equity or equity-like instruments without the need to find buyers immediately. The scheme also turned out to be an empty package. Sadly, the economy could not witness the delivery of its results.
The RBI Governor, Urjit Patel, has a monumental problem on his hands. | Photo Courtesy: QuartzCurrent course of action
The desperate attempts of the central bank in the past to mitigate the problem of stressed assets seemed to go in vain. Arun Jaitley, the Finance minister, has proposed to increase allowable provision for the non-performing asset of banks from 7.5 per cent to 8.5 per cent in the budget 2017-18. Also, they have allocated 10,000 crores in the ‘Indradhanush’ scheme which was launched in 2015. This scheme focuses on the recapitalisation of banks. One can expect other measures also to follow, but looking at the current condition, it is over-optimistic to say that these schemes might work.