The plan to create a bad bank may hit a wall, as the banking regulator and the government, which is expected to finance it, are not going to accept two key proposals that the bankers’ lobby group has made.
The Indian Banks Association(IBA) wants to transfer accounts where fraudulent activities have been detected to the new entity that will hold their risky assets. It is also proposing to sell bad loans at book value to the asset reconstruction company (ARC).
A government official involved in assessing the IBA’s plan asked how the government could pay for loans where a fraud had been declared. “There is a moral hazard issue here,” he said
As per the plan submitted to the government and the Reserve Bank of India, fraud-hit accounts could be considered on a case-to-case basis, with approval from the regulator, to sell to the bad bank. However, banks who sell these loans will have to deal with all inquiries relating to fraud investigation.
Current rules don’t allow the sale of such loans. Banks cannot sell bad loans that have originated fraudulently or have been classified as fraud as on the date of a planned sale, the RBI had said in an April 2011 communication to all scheduled commercial banks.Banks have a plan to transfer ₹70,000 crore of bad assets to the proposed ARC.