India’s Bad Bank Must Be Faceless. “Give a man a gun, he will rob a bank; give a man a bank, he will rob the world”.
National Asset Reconstruction Company (NARCL) and its monitoring associate, India Debt Management Company (IDMCL) jointly known as Bad Bank are being set up at a huge cost. Public sector banks (barring loss making Punjab & Sind Bank) and power companies will pick up the equity bill. Centre shall fund Rs.30,600 cr and government banks will gift their faded jewels of big loans worth Rs.225,000 cr. Initially, only 15% shall be paid by Bad Bank to asset parting banks out of free equity received from them. Banks may receive less than they in-vest as equity. The initiative is one of the biggest economic gambles of our times; an expert seeing it as “a Galant effort of throwing good money after bad money by an army of pseudo economists indulging in chutzpah.”
A bad bank is a corporate structure that isolates illiquid and high-risk assets held by a bank. It is not involved in lending and taking deposits, but helps to resolve bad loans. It can help clear off their balance sheets by transferring bad loans and focus on core business and lending activities. The first bad bank Grant Street National Bank was created by US-based Mellon Bank in 1988 to hold its “toxic assets”. GSNB purchased Mellon’s bad loans at a 53 percent discount. GSNB was a private-sector experiment with no capital from the government, focused on recovery under separate management, and was dissolved in 1995 after meeting its objectives.
In Feb 2021, RBI announced a structure for Bad Bank, and going by its structure, the setting up of a bad bank may not be a potent idea as there are already 29 ARCs in operation and banks have failed to sell bad loans to them. Former RBI governor Raghu Ram Rajan finds this venture as shifting loans from one government pocket (the public sector banks) to another (the bad bank). The doubts about the success of Bad Bank are genuine. Bad Bank will have no magic wand to recover loans. It has to navigate through the nascent IBBI and NCLT who are fighting for their identity and sulking under contradictions of settling loans at 4% of the outstanding amount, much below the banks were realising through illiterate and rowdy recovery agents. As no special powers are vested in Bad Bank, the shuffling of accounts from one pile to another is an exercise of indulging in the reflected glory of having cleaned the sitting room by shoving all the garbage to the bedroom!
The malaise of NPAs shall not evaporate in thin air with change in dramatise personae as there is no talk of setting up special sum-mary recovery courts or entrusting quasi-judicial powers to Bad Bank to escalate a reverse flow of public money presently in the tight embrace of wilful defaulters. What is in the offing is another brick and mortar structure sheltering recovery tired bankers. There is serious apprehension of Bad Bank becoming a den of corruption selling public jewels at throw away prices based on the manipulated valuation of assets.
The RBI in its Financial Stability Report has warned that the gross NPA ratio may increase from 7.5 percent to 13.5 percent by September 2021. This will be the highest in more than 22 years and will put pressure not just on our banking system but also on the economy which suffered an unprecedented 23.9 percent contraction in the April-June quarter. The K V Kamath Committee, noted that corporate sector debt worth Rs 15.52 lakh crore has come under stress after the Covid-19 hit, while another Rs 22.20 lakh crore was already under stress before the pandemic. This effectively means Rs 37.72 lac crore (72% of the banking sector debt to industry) remains under stress. This is almost 37% of the non-food bank credit.
It is also being debated that the loans may be acquired by Bad Bank at the current book value by paying 15% in cash and the balance 85% in security receipts. The government would provide a guarantee to the security receipts issued by the bad bank. In case a bank sells a loan of Rs 100,000 to Bad Bank and if the Bank has already made 75% provisions for the loan, then the book value of this loan is Rs 25000, and 15% of Rs 25000 i.e. Rs 3750 is cash to be paid to banks. Thus, for taking over say Rs 2 lakh crore of NPAs, a cash outflow of Rs 7,500 cr and issuance of SRs worth Rs 42,500 cr may be required.
Going by the above envisaged structure if banks are to be paid in five years through Bad Bank, then why not pay them today without a Bad Bank. Going around in a circuitous way wasting national bandwidth of resources soiling the scarce capital would unnecessarily put the clock back.
Banks have already been pauperised by defaulters and fraudsters and are left with little Penny to anoint NPAs as kings in the new pawn game of Bad Bank. Researchers Brei, Gambacorta, Lucchetta, and Parigi (Bad Bank Resolutions and Bank Lending, BIS Working Paper No. 837, February 2020) conducted a study on bad banks, based on data covering 135 banks from 15 European banking systems over the period 2000-2016, and derived that bad bank was effective in cleaning up balance sheets and enhancing bank lending only if it combined recapitalisation with asset segregation. Used in isolation, Bad Bank won’t spur lending and reduce future NPAs. A Bad Bank setup was more effective when asset purchases were funded privately with more efficient legal systems.
Economists perceive banks will park all their bad assets and nothing will happen there. In order to be a Good Bank, the Bad Bank must embrace the following:-
1. The bank has to be totally faceless, fully digital sans human intervention.
2. There should be no interaction between Bank officials and customers.
3. Initial 22 accounts worth Rs.89000 cr have footprints in 12 banks. The entire backup record, files, documents, property papers, legal petitions, and NCLT/ IBB files may not be more than 44 truck loads. The entire record should be microfilmed, digitised, and hosted online in few weeks.
4. Virtual data rooms be created for each account with access given to prospective bidders online with Rs.10 crore security deposit to desist, brokers, window shoppers, and fly by night hunters of economic gold.
5. A transparent price mechanism based on international benchmarks and approved by Bad Bank Board based on interest rates & demand and supply situation be displayed to enable the prospective buyers to arrive at the purchase price online, themselves.
6. An integral concept of discount on purchase price be derived on the basis of the volume of down payment and time required to pay the full consideration.
7. The bids should also be opened/accepted/rejected/discussed fully online.
8. The staff of Bad Bank to be anonymous or pseudonymous and restricted from disclosing official identity in public.
9. Each account should have 100% information on the chatbox to respond to queries of prospective investors through blockchain technology.
10. Apart from Valuers, Assessors, Online Negotiators, and Technical Experts, vigilance officers with credit & investment backgrounds be posted as staff.
11. The chatbox articulations be in five languages German, Russian, Chinese, French, and Spanish to harness worldwide interest.
12. Special NCLT Courts to deal with Bad Bank cases be exclusively established. Semi Judicial powers be anointed on Bad Bank to expedite recoveries.
13. Suitable structural reforms that are required in parallel to deal with the NPA at large be instituted to hinder flooding of Bad Bank with debris.
14. Know Your Customer framework to be institutionalized to filter fake buyers from grabbing assets as land parcels for real estate deals.
Nation learns by assimilating wisdom from contemporary developments. In the Indian context, the melodrama is spun around State selling and buying to its own banks resulting in the incarnation of a sweeper bank under the tutelage of a legal system that is quite distant from efficiency due to serpentine queues outside each court.
Bad Bank is an imported idea being set up as a work-in-process to carve an edifice to firewall the Indian banks from toxicity. It may herald credit growth or yield a tendency for reckless lending. It may divest the Indian banker from living a full cycle of ups and downs with the borrower or make him forget the nightmare of crumbling NPAs. It is not a herculean task but the best foot has to be put forward to do banking with clean hands.
Given the Indian ethos, the lofty idea of a change of face of banking through a Bad Bank has to be compulsorily Faceless to keep away corruption in the sale of assets.
Rightly said, “Business and life are like a bank account you can’t take out more than you put in.”
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe. Has undergone International Banking Training from Asian Institute of Management, Manila, the Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange, Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit, Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner, Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker having conducted multiple Motivational Seminars for institutions like ONGC, the National Housing Bank & the Bank of Baroda. He is an Independent Director & consultant to various big entities in the corporate sector at present.