Govt-owned bad bank is more capital efficient, can massively lower credit charge: Report

The most important is that the capital charge on the banks going down to 0-20 percent from 100 percent and these securities are guaranteed by the state as if now it is issued by the fully owned government company.

In regards to the reports about the control of the proposed bad bank, a brokerage has been called and he is, saying state-funding is more capital efficient as it also helps in lowering the credit cost/loss for the banks if compared to speeding up implementation.

The proposed bad bank owned by the government will be more capital efficient and will also not affect the fiscal numbers, as otherwise, it will have to keep on changing the state-owned lenders as they will be the biggest beneficiaries of the proposed bad bank, said by the Bank of America Securities India in his report.

If you see, this kind of set-up can bring down the credit charge on banks to a fifth in the worst-case scenario from the 100 per cent now, the report added.

As per the report, the data showed as of March 2020, 2.8 percent or Rs 2,89,500 crore, which is about 1.3 percent of the GDP, is the net non-performing loans of banks.

And as per the data, it has made a jump of 13.5 percent by this September, a two-decade high, as per the Reserve Bank of India it has the  impact of the pandemic on the companies and banks.

A stress test by the central bank in January,showed that public sector banks’ gross NPAs have risen from 9.7 percent in September 2020 to 16.2 percent in September 2021, while private banks’ from 4.6 percent to 7.9 percent, and foreign banks from 2.5 percent to 5.4 percent, making the system-wide bad loans to 13.5 percent by September this year.

The conclusion 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 and provide an opportunity for improving asset quality when real lending rates are falling.

But, the question is who will fund it? If state-run banks/FIs fund it the ARC will largely take over their bad loans, which was 2.8 per cent in March 2020. In this scenario, banks would then transfer their NPAs against security receipts issued by the ARC, it said.

A fully government-funded ARC will be faster to set up and will also be more capital efficient it was said by the house economists at the brokerage.

On the fiscal side, it will not affect the government as the government has to ultimately recapitalize bankers, and so the potential fiscal impact is similar and it can easily draw down the RBI’s revaluation reserves to recapitalise banks in a fiscal-neutral and liquidity-neutral transaction, the report said.

State funding may be faster and more capital efficient, it added.

The capital requirement of the ARC will depend on whether it is asked to maintain a CRAR of 9 percent of RWA as applied to banks or 15 percent as applied to NBFCs.

The equity provided by the government will have to anyway recapitalize the write-offs either as the owner of the ARC or the owner of the state-run banks. Also, it is not clear if bank balance sheets can bear the loss of delayed recovery.

In any case, the government will end up implicitly guaranteeing recapitalization of PSBs at the least.



I have read the Privacy Policy & Agree to Terms & Conditions and authorize Dialabank & its partner institutions to Call or SMS me with reference to my application.