Bad Bank Good But We Need Better

Context: While there are many Asset Reconstruction Companies (ARCs) buying sticky loans from banks, a vibrant bad loan market has not taken off in India.

Reasons behind Distorted Bad Loan Market of India

• Fear of investigation: Bankers are reluctant to sell loans, fearing that, they could be investigated by the Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC) or Enforcement Directorate (ED) for having sold at a ‘loss’.
  • They either refuse to sell or ask for a price that ARCs aren’t willing to pay.
• Aggressive bidding for loans by ARC: which compel auctioning banks, who don’t want their decisions to be questioned, sell to the highest bidder.
• Loss to the banks: Deal between the banks and ARC may happen partly in cash and Security Receipts (SRs). However, less than 30% of SRs issued by ARCs till now have been redeemed.
• Deal has slowed down: While banks prefer cash deals, they are unwilling to lower the price on loans, leading to adverse consequences -
  • Fresh loans by banks to private companies have come down, and Non-Performing Assets in bank books are either old loans that are difficult to recover or require fund infusion.

Measures for Developing a Vibrant Bad Loan Market in India:

• Bankers must be allowed to trade loans (both bad and good) freely:
• Encourage institutional investors to buy, hold or trade in bad loans: directly from the banks without tying up with an ARC.
  • Allowing private equity houses, venture capital funds and pooled vehicles to resort to debt recovery tribunals and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act.
• Transparent trading of Security Receipts (SR): on a separate exchange platform would help price discovery of bad loans and make it easier for banks to accept and defend realistic rates.
  • It would stop shady deals that promoters cut with ARCs to hold on to companies.