The finance ministry is considering setting up of a ‘bad bank’ — one that will absorb non-performing assets (NPAs) of public sector lenders.
The issue was discussed at a pre-budget meeting between finance minister Arun Jaitley and top economists on Wednesday, finance ministry sources said.
The NPA level, currently over 6% of banks’ total advances, has become a cause for concern. Prime Minister Narendra Modi is said to be closely monitoring the situation himself.
Once NPAs — loans that do not yield returns — are segregated and transferred into a new “bank”, lenders can resume normal business functioning and start lending again instead of focussing on management of bad assets
“We need to have a bad bank to handle NPAs while cleaning up banks’ balance sheets so that they can start lending again,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India, told HT.
The ‘bad bank’ can either hold the bad assets until borrowers start repaying or look at selling those stressed assets to investors.
In the US, Citigroup segregated over $700 billion worth of bad assets into ‘bad bank’ Citi Holdings in 2009. Countries, including the UK, Sweden, Finland and Ireland, have ‘bad banks’ as well.
At present, most banks are mainly focussed on recovering bad loans. Ashwani Kumar, chairman, Indian Banks’ Association, recently said state-owned banks have started loan portfolios as small as Rs 10 lakh. Credit disbursement has also gone down.