Proposal of ‘bad bank’ submitted by IBA to Government and RBI

IBAThe Indian Banks’ Association(IBA) has submitted a proposal to set up a ‘bad bank’ for approximately  75000 crores worth of non-performing assets (NPAs), to the finance ministry and Reserve Bank of India(RBI) on Tuesday. A bad bank is a corporate structure that isolates risky assets held by banks in one place. “We are requesting the government to provide 10,1000 crores of initial capital.”

The proposed structure of a bad bank is based on the earlier recommendations of a panel headed by Sunil Mehta (former PNB chairman), called ‘Sashakt’ two years ago.

IBA has proposed to set up an asset reconstruction company(ARC), asset management company (AMC), and alternate Investment Fund (AIF), ARC will be owned by the government, but the AMC and AIF will have participation from the public as well as the private sector, as per the proposal. The Mehta Committee has earlier proposed to set up an AMC and an AIF to resolve NPAs over  500 crores.

In an interview, SBI chairman Rajnish Kumar, who is also the chairman of IBA, said that the lenders were toying with the idea of creating a bad bank to deal with stressed assets. Kumar said the time was right to set up a structure, along the lines of a bad bank, given there are adequate provisions for existing NPAs.

Rating agency CRISIL in its report had projected NPAs of banks to rising by 150-200 basis points (bps) in the financial year 2020-2021.

“We are expecting a discussion on ‘bad bank’ with the finance ministry in the next meeting,” a public sector bank’s head told. Sitharaman’s review meeting with heads of public sector banks was postponed on Monday and a new date is expected to announced soon.

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