Coronavirus crisis: Major lenders revive idea of 'bad bank' to deal with high NPAs; 'this is right time to work it out', says SBI CMD Rajnish Kumar

A proposal to consider creating a bad bank to deal with bad loans is on the cards. A bad bank structure has long been discussed in India’s policy circles to deal with the high level of non-performing assets (NPAs) that have hobbled banks for years, bogging down credit and economic growth.

With the banking sector sitting on high provision for non-performing assets and the COVID-19 crisis expected to worsen the situation, State Bank of India (SBI) and other major lenders are reviving the idea of a “bad bank”.

“These are some initial thoughts at the IBA level and by many members in IBA,” Rajnish Kumar, CMD of SBI told CNBC-TV18 in an interview, referring to the Indian Bank Association.

“We believe that this is the right time where a structure along the lines of a bad bank can be worked out because the provisions on the existing NPAs - most of the banks are holding a very high level of provisions.”

Kumar’s comments come in the wake of the coronavirus pandemic, which is expected to result in a rise in NPAs of banks despite a number of relief steps taken by the RBI, including allowing a 90-day moratorium on retail loans and relaxing working capital financing norms.

The SBI chief’s comments suggest that the bad bank could be an industry effort – perhaps through the creation of an asset reconstruction company (ARC)-cum-asset management company (AMC) – rather than one implemented by the government. Bad bank structures are typically suggested to be modelled on the TARP programme implemented by the US government during the 2008 financial crisis.

Kumar said that the idea of bad bank was not feasible three years ago, when talk began that banks should spin off bad assets into a separate company to unburden existing banks.

“The provisions were inadequate. Today, at least we have the adequate provisions and net book value is hardly 10-15% of the gross NPAs,” he said.

The SBI chief stated that these discussions were at a very early stage.

“Once the approach and a consensus emerges between all the banks, then only [we will look at the> next moves – whether we need to take some external regulatory dispensation or do we need some support from the government, whether the government support will come or not come. All these are open issues.”

REC, PFC participation may be crucial for the bad bank to become successful, sources told CNBC-TV18.

A separate report by The Economic Times said banks intend to request an initial contribution of at least Rs 10,000-15,000 crore from the government.