India Needs `Bad Bank' to Clean Up Soured Debt, Rating Firms Say

  • Lenders reluctant to offer deep discounts on bad loans: Fitch
  • RBI proposes national bad bank to tackle unviable loans

Ratings companies including Fitch Ratings Ltd have come out in favor of setting up a state-backed “bad bank” to tackle India’s ballooning stressed assets problem, a move resisted by Raghuram Rajan, the former governor of the Reserve Bank of India.

Stressed assets -- made up of bad loans, restructured debt and advances to companies that can’t meet servicing requirements -- have risen to about 16.6 percent of total loans in India, the highest level among major economies, data compiled by the nation’s Finance Ministry show. A bad bank would help facilitate the resolution of soured loans, something that various small private restructuring companies have failed to do so far, according to Saswata Guha, a Mumbai-based analyst at Fitch, said in an interview last week.

RBI Deputy Governor Viral Acharya proposed last month setting up a national asset management company for taking over unviable assets held by banks, giving new life to an idea proposed by the Finance Ministry last year. Local lenders Bank of India, IDBI Bank Ltd., Indian Overseas Bank and Syndicate Bank have been downgraded by international credit assessors amid rising concerns over bad debts.

The RBI completed its audit of the nation’s 50 lenders last year, forcing them to lay bare previously hidden non-performing loans. Asset quality for private sector banks will likely deteriorate, while the pace of worsening for public sector banks has slowed in the past two quarters, according to a Feb. 23 report from Moody’s Investors Service.

India’s finance ministry spokesman DS Malik wasn’t available for a comment, when contacted by phone Friday.

RBI Capital

Last year, Rajan, who stepped down as RBI governor in September, spoke out against using central bank funds to recapitalize public-sector banks. The government had earlier suggested using the Reserve Bank’s own capital to either be directly injected into public-sector banks or used to create a “bad bank" to resolve soured debt.

Banks had been reluctant to offer discounts to offload bad loans even where they are clearly worth much less than their book value because such sales “invite the attention of anti-corruption agencies making bank officials reluctant to sign off on them,” Fitch analysts including Guha wrote in a Feb. 23 note.

“With more than $180 billion in stressed assets, the government and regulators have to evaluate all avenues including a bad bank to drive better recovery rates,” said Nikhil Shah, managing director at Alvarez and Marsal, a firm that specializes in turnarounds. “Mechanisms offered by the RBI haven’t been successful in resolving bad loans primarily as the RBI does not regulate promoters and other equity stakeholders and as a result they cannot force resolutions on to them.”

A centralized restructuring asset manager could take charge of the most complex and largest distressed cases, and make politically tough decisions to reduce debt, according to Fitch analysts.

“Bankers selling bad loans to a national bad bank won’t be questioned, as this institution will be empowered by the government to take tough decisions,” said Rajesh Mokashi, managing director at CARE Ratings Ltd. in an interview. A bad bank will also bring to an end to fear of “witch-hunting” of lenders, if any, by anti-graft agencies, he said.

— With assistance by Anto Antony

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