Three Facets of Bad Bank

Three Facets of Bad Bank – Vantage Point

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Bad Bank or National Assets Reconstruction Company sans any crises is a misnomer. Unless the three tier system is made powerful, Bad Bank would not be a panacea. Let’s analyse the importance of three facets whilst implementing Bad Bank in India :

Firstly, NPAs figure vis-à-vis size of purchase of bad debts would be a myth. That NPAs worth Rs. 500 Crore or more targeted to be purchased by Bad Bank is required to be relooked as it would have more hair cuts and NPAs worth below Rs. 500 Crore require to pay more attention.

Secondly, Budgetary provisions for the bad bank or expenses to be made over bad bank is a serious cause of concern. As what miracle the Bad Bank will make which could not be done by the existing Public Sector Banks.

Thirdly, unless robust recovery mechanism is introduced by overhauling the recovery laws, Bad Bank may not be a panacea.

Why the government should think about lowering the minimum limit of Rs. 500 Crore for purchase of stresses assets has the obvious answer as the situation arisen out of moratorium is a serious concern for near time to come.

NPAs figure is dubious for FY 2020-2021 :

-?????Banks had written off relatively more NPAs in FY 2020-2021 to clean their balance sheets;

-?????Some large NPA Accounts ever-greened by restoring to normal account either by settlement or revival;

-?????Accounts under stress and on verge of NPAs got lifeline due to Covid related moratorium those accounts have been differed into category of NPAs.

-?????As of August 2021 accounts of Public Sector Banks representing more than 40% opted for moratorium, the GNPA ratio is therefore of conservative estimates.

-?????Here, we should remember the quote of Jeffry Friden, who said that “the policy that economic analysis indicates is best for the economy may not be politically feasible”.

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We need to look in the ‘Infant Industries Theory” philosophy when the matter of grant of moratorium comes frequently by RBI. It relates with the fact that new industries in developing countries need protection against competitive pressure until they mature. The theory developed by Alexander Hamilton and Friedrich in 19th Century is a justification to protectionist trade policy.

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Developing countries may enact measures like moratorium for protection and to fight against pandemic and to restore their financial health. The said philosophy was later on ameliorate by John Stuart Mill and said that infant industries should only be protected if they can mature and then become viable without protection. Later point of time, Charles Francis Bastable added a single condition that the cumulative net benefits provided by the protected industries must exceed the cumulative costs of protecting the industry. This principle if applied about exceeding cumulative costs for protecting industry, we could restrain the mounting up NPAs to new scales. Applying the said analogy, the benefits of moratorium has been granted to adolescent industries also sans paying any cumulative costs. We need to introspect now, as we are passing through the third wave and the benefits granted on past occasions are going to be matured in near time to come. The stance of government or RBI would be imperative and they should take the pragmatic view.

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Measures commonly taken by government and RBI, such as lowering interest rates or implementation of moratorium have temporary impact, to mitigate the effect, however, they are not long lasting. Responsibility to protect financial risk must fall on the government and they should evolve the procedure for recovery also, soon after the benefits granted to industries are over due to aftermath of pandemic. one cannot build a great building on a weak foundation. We must have solid foundation if we are going to have a strong superstructure as said by Gordon B. Hinckely. Things build on a weak foundation will eventually crumble.?