The problem of NPAs still looms over the banking sector, and the Centre is thinking about creating a 'bad bank' to resolve the issue.
The banking sector took a tremendous hit last year due to the COVID-19 pandemic. Due to the drastic economic slowdown in the previous year, the Indian banks are now staring at a new pile of NPAs which was already stressed under previously mounting NPAs.
Since March, she has announced a number of measures to support the economy and businesses amid the pandemic, and more measures are expected going ahead. So far the stimulus measures by the government and the Reserve Bank of India (RBI) add up to about Rs 30 lakh crore.
The Cabinet has already approved the strategic sale, along with transfer of management control, in over 25 public sector companies, including Air India, BPCL, Pawan Hans, Scooters India, Bharat Earth Movers Ltd (BEML), Shipping Corporation, Cement Corporation, and some steel plants of SAIL. It has pushed various measures to support small and medium-sized companies.
The problem of NPAs still looms over the banking sector, and the Centre is thinking about creating a 'Bad Bank' to resolve the issue.
What is a Bad Bank?
A Bad Bank collects all the stressed assets in the financial system and tries to resolve the issue leaving the banks to focus on the business at hand. A financial entity with NPAs will sell its holdings to the Bad Bank at a market price.
The asset-transfer will help the financial entity clear its balance sheet.
The current scenario with NPA's doesn't look good for the Indian banking system. Currently, it has around 8.5 percent gross NPAs, and according to RBI estimates it can rise up to 12.5 percent by March. In worst-case scenario, it may mount up to 14.7 percent.
Many financial experts are of the opinion that excess excessive dependence on capital infusion to make up for NPAs may not be good for the long haul.
According to News 18 business, there is increasing cost to the government in servicing the over Rs 3 lakh crore recap bonds. For this fiscal alone, the interest cost is Rs 25,000 crore plus repayments on the date of maturity.
However, certain government officials feel that RBI's nod is required to kickstart the initiative.
It is however imperative to note that DEA Secretary Tarun Bajaj, in a CII webinar on December 18 has said that he did not rule out the possibility of setting up of Bad Bank.
"Banks are an important area which we need to correct. We are looking at various options including the option that you have mentioned, it is still in the works so let us wait a bit, let us wait for a slightly longer period for us to unveil." he said.
It is to be noted that only Rs 20,000 crore worth of PSB recapitalisation has been finalised for the current fiscal, and reportedly further recapitalisation has been sought.
With Nirmala Sitharaman going to present the budget next month, it remains to be seen what the Centre has planned out for the banking sector.
Meanwhile, Union Finance Minister Nirmala Sitharaman on December 17 said that any amount of government intervention will not be adequate to deal with the impact of novel coronavirus on the economy.
The government's spending plans particularly on infrastructure and social sectors as well as relief to sections hit by the pandemic and lockdown will dictate the pace of recovery,
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