The Indian banking system will have to endure further pain of loan-loss provisions aggregating about ₹4 lakh crore, according to Kotak Mahindra Bank’s internal research.

According to the private sector bank’s estimate, the total stress (includes net non-performing loans, restructured assets, assets and securitised receipts with asset reconstruction companies, and assets undergoing strategic debt restructuring) in the Indian banking system is about ₹14 lakh crore.

“Now since some provisioning has also happened against this (stressed assets), our view is the further loss which the banking system will have to take is roughly about 30 per cent. So, about ₹4 lakh crore is the further pain which we believe the banking system has to take.

“So, the banking industry needs ₹4 lakh crore, which is 50 per cent of its current total capital base,” explained Uday Kotak, Executive Vice-Chairman and Managing Director, Kotak Mahindra Bank, after launching the ‘811’ full-service, mobile-based digital banking ecosystem.

Now if one takes out the loan-loss provision of ₹4 lakh crore out of the ₹14 lakh crore stressed assets, the banking system is left with ₹10 lakh crore of assets at fair value, which could possibly be resolved by two or three large, well-capitalised “bad banks”.

“Two or three large, well-capitalised bad banks is what I see is the way we should be thinking…And in these well-capitalised bad banks, I would love to see the most significant portion of this (capital) coming from private sector capital.

“...And if these bad banks are leveraged even 3:1, you are talking about ₹2.5 lakh crore of incremental equity to sort these assets out,” said Kotak, and added that asset reconstruction companies are horribly under-capitalised.

The challenge in the Indian banking industry is that there is need for strategic capital and strategic management for asset resolution.

The size of capital (₹4 lakh crore of loan-loss provisions plus ₹2.5-lakh crore of incremental equity or $100 billion), financial and strategic, required to really transform Indian banking is humongous.

“And we see significant opportunity — what shape and form, and how, at this point of time is too early for us to be able to tell you specifically. But when we are ready, we believe this is a very significant long-term opportunity for reshaping India’s financial sector,” explained Kotak.

Stressed assets pricing

He underscored that the current structure of pricing of stressed assets in India is very challenging, where a seller of a stressed asset is the buyer of 85 per cent of the same stressed asset.

“And, therefore, effectively, on the balance 15 per cent, it is asset management rather than a true sale, in my judgment. Our view is that the whole stressed assets piece needs significant capital and the government may have its own plan but there could be a very large play for private sector. And we are open for ideas in that context,” said Kotak.

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