Banking woes: How to solve India’s bad debt problem -Economic Times 28.03.2014
By: Arun Duggal
India needs a National Asset Management Co (Namco) to prevent the problem of non-performing loans turning into a banking crisis, and revive the economy. The economic slowdown and challenges in the infrastructure sector have hurt bank portfolios. NPAs in the banking sector are estimated at 5% of advances, and higher for some banks. Restructured loans account for another 5% and, perhaps, another 5% of the portfolio is at risk. When bankers and bank boards are focused on dealing with NPAs and credit problems in their portfolios, they are reluctant to extend new loans.
This slows down new investments and hurts economic growth and job creation. The most effective way to deal with a single troubled institution is to separate the concerned bank's problem portfolio from the good portfolio, the so-called good bank-bad bank model. But what if problems are widespread in most of the banking system? There are two good precedents to learn from: the Resolution Trust Corporation (RTC) in the US and the Korea Asset Management Co (Kamco). The National Asset Management Agency, Ireland, is also a good model.
In the mid-1980s, the US economy faced high inflation and an economic slowdown. It led to the savings and loan crisis, with many savings and loan associations or thrifts headed towards insolvency. The RTC, a government-owned asset management company, acquired nearly $400 billion of assets, mainly related to real estate, and resolved them efficiently Bad debt was the trigger for the Asian financial crisis in 1997-98.
The government of South Korea set up the publicly-funded Kamco that purchased bank NPAs and then proceeded to resolve them in a focused and innovative manner, including by issuing assets-based securities. Back home, the government and the RBI should facilitate the formation of Namco, with banks as its major and initial shareholders with an equity base of around Rs 6,000 crore. Namco's goal should be to resolve the NPA problem. Its main activities will include NPA acquisition, aggregation and resolution, including the sale of businesses, or assets, or management change. Then comes the rehabilitation, recapitalisation and refinancing.
It will also be a conduit to attract fresh capital, particularly international capital and expertise into this sector. Namco should be governed by an independent board that includes Indian and international banking experts. Its expertise, independence and speed of action will determine its success. Namco should target big-ticket problem assets in the banking system, estimated at Rs 3,00,000 crore.
To buy these assets, it should get them independently valued and pay by security receipts of appropriate structure and maturity and receive a management fee. Selling banks should be allowed by the RBI to write off the haircut taken in selling these loans over five years, softening the hit to banks' profit and loss accounts. Namco can then aggregate loans from different seller banks and develop a comprehensive resolution strategy for each situation. Nearly half of Namco's acquired assets will be in the power sector.
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