Concocting a Bad Bank

This article has been written by Amrit K.N. Pradhan. Amrit is a student at Rajiv Gandhi National University of Law, Patiala.



“The More you meander around with things, the more they stay the same”.

It is that time of year again when you are less than a week away from Diwali break. The anxiety levels are at the optimum. There are though things to hold on and calm you down, especially when you are in the hot seat doing what you like.

However, situation is not such rosy in the Mint Street. Even after the Asset Quality Review (AQR) under the aegis of RBI which meant classifying non-payable interest payments into the head under non-profitable assets, balance sheets are still in a bottleneck. October is a busy period not only for business houses but also for stock traders who have their hands full with a a barrage of information from M&A’s to Sales stats etc. The most important however is the financial results of the companies for the just bypassed Q2. Analysts with their hawk-eyes are on their toes to pounce on looking for that extra paisa here and there.

If you ask them about the sectors to keep an eye on for long positions – pharmaceuticals, automobiles and FMCG would do the rounds. On the contrary, if you ask them for short positions –  ITES, banking (especially public sector banks or PSBs) and metals would make up the list. Out of the six sectors banking is what is the oxygen for the other five. And public sectors banks (by market share) contribute more than 70% to the Indian economy.

The problem of PSBs non-performing assets (NPA), far from easing, seems to be getting worse. In the last financial year (2015-16 or FY 16) their gross NPA rose from 9.5% from 5% from FY15. Out of the total Gross NPA (approx. 5 lakh crore) in the banking sector the contribution of PSBs is 88%.

Bank Board Bureau (BBB)

Gross Capital Formation (GCF) refers to the net increase in physical assets (investment minus disposals) within the measurement period. As per the latest figures (as of October 4, 2017) it is 28.3 %, the lowest in the last decade. It hit the highs of 35 % at its peak in 2000. Whatever sub-8% GDP growth India has achieved is due to intervention of the fiscal policy of the Government.

The Government has its hand tied to extend its fiscal intervention due to its aim of hitting the mark of 3% CAD or Current Account Deficit by 2017.

To deal with the situation the Ministry of Finance has already recapitalised banks and aims to influx more of it in the future with the backing of Union Minister of Finance Shri. Arun Jaitley. To deal with situation holistically a BBB has been setup under the hawk-eye of the former CAG Shri. Vinod Rai.

It aims to oversee professional appointment into the boards of the PSBs, check the application of best practices and create a platform wherein such a situation of ‘Trickle Down Credit Growth’ does not occur even after RBI has done its bit for improving the credit scenario in the country.

One of the firsts’ in restructuring the balance sheets of the banks was whether to create a Bad Bank to house these ‘Non-Profitable Assets’ in an independent structure. It would mean wiping of the clog from the balance sheets of these PSBs. However, the repudiation for creating such a ‘bad bank’ is there more than a dozen of such Asset Reconstruction Companies. Creating another under the weather may create an environment for a race to the bottom.

A recent example of such event would be the creation of such a bad bank in ‘sick’ Italy where such a bad bank’s resources were exhausted in recapitalising just one bank i.e. Banca Monte deiPaschi di Siena Spa.

However, the solution to such a problem has already been Made in India. India’s largest bank (as per market share) State Bank of India is on the heels of merging its sister banks to hold it in good stead in terms of balance sheets and to rise higher in the global league tables. This merger is very objective in nature as a smaller bank has extensive local knowledge and functional efficiency. Creation of a centralised organisation would make the decision-making process and the lending process even slower.

The key to solving the bleeding of banks would be to bring in best professional practices and let them compete with the private banks in the sector by divestment of government stakes in these PSBs (For eg. – Check the recently released Financial Results of RBL Bank). Making half-hearted effort in solving the problem like temporarily creating a bypass for reducing the logjam would be nothing but beating around the bush. That is the least Indian economy needs to continue grow at par-8% and build a good base for Make in India.

 Just glance an eye for inspiration on the recent leadership and management skills of Shri. AshwaniLohani, MD of Air India which conjured up an Operating Profit of Rs. 105 crores in FY16 (you shouldn’t rule out thought the effect of culled down global crude oil prices).

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