The government is evaluating the option of setting up a new entity to take over the non-performing assets (NPAs) of public sector banks (PSBs). It may not, however, be called a ‘bad bank’.
Various countries, including the UK, Sweden, Finland and Ireland have set up bad banks. A ‘bad bank’ can either hold bad assets until borrowers start repaying or look at selling those stressed assets to investors.
“The issue was discussed at length at the Gyan Sangam (the two-day retreat for public sector bank chiefs) that was held in the beginning of the month... the decision has to be taken after a lot of deliberation as this is done only when other options don’t work,” a government official told HT.
“Once the new structure is in place, we are hoping that the consolidation process (of PSBs) will kick off,” the official said, adding, once bad loans are transferred to the new entity, banks would be more willing to look at mergers.
At present, banks with high level of NPAs find few takers.
RBI governor Raghuram Rajan had said last month there was no need to create a bad bank to handle NPAs since PSBs themselves have the backing of the government.