Opinion

Bad bank will merely camouflage NPAs

S Kalyanasundaram | Updated on September 26, 2021

NARCL does not have the expertise to recover the transferred NPAs

The government has announced the setting up of the National Asset Reconstruction Company Ltd (NARCL). This will take over bad debts of nearly ₹2-lakh crore from banks.

The government is also providing back-up guarantee of over ₹30,600 crore to the entity. Indian Debt Resolution Company Ltd, which has already been formed, will function as the asset management company for NARCL.

Ignoring various criticisms in the public domain in forming a bad bank, the government has gone ahead with this arrangement as a solution to tackle the problem of non-performing assets (NPAs) of banks.

To know the impact of this new arrangement, answers to some fundamental questions are needed.

Technically, as NPAs will be transferred from the books of banks to NARCL, the NPA figure of banks will come down. But it must be understood that now it is only parked under the banner of NARCL, and recovery of NPAs has not happened. The NPAs in the financial system do not change at all and, in fact, with one more tier in the system, the NPAs, thanks to additional expenditure, will go up.

This arrangement is nothing but a window-dressing of the actual position.

Will recovery improve?

It is called an arrangement of resolution to remove NPAs from banks’ books. But it is not recovery. What banks need is recovery of the amount lent with interest and not some other arrangement. The NARCL does not have any extra mechanism and calibre to recover the transferred NPAs.

The NARCL personnel do not have any specialised knowledge or skill to recover from incalcitrant borrowers Even under the legal framework, there is no extra powers or rights with the NARCL.

The power of NARCL is the same as that of the banks that originally financed. In fact, the financing bank’s knowledge about the borrower will be far higher than that of the NARCL as the customer will be new to the NARCL. Hence there is no way for the NARCL to enhance recovery.

As banks will be receiving 15 per cent of the amount transferred, this may increase their cash flow and hence the lending capacity. It is expected that ₹90,000 crore of NPAs may be transferred initially to NARCL.

This may provide banks with around ₹13,500 crore, which is not a big sum for the banking system. When compared to the outstanding bank credit of ₹1,09,49,509 crore (2020-21), this is miniscule.

There is a proposal that banks will be getting 85 per cent of the amount transferred as security receipts (SRs).

The SRs may be transferrable and marketable. But considering that they are almost like junk bonds, will there be takers? Even assuming that someone is willing to buy the SRs, they may go at a steep discount, which will erode the profitability of banks.

When NPAs are removed from banks’ books, reckless lending may start once again, on the expectation that NPAs can be transferred to the bad bank.

The appraisal and monitoring systems may be diluted as there is a readily available avenue to wriggle out.

Guarantee by the government?

The government provides guarantee for any shortfall in the payment by NARCL in the 85 per cent of the amount transferred. There is a cap of ₹30,600 crore on this. This may enhance the tradability of SRs. But there is every possibility that NARCL may not be able to recover the full amount and invoke this guarantee.

Though at present it is a contingent liability, in future it may turn out to be actual liability. This will be another outgo of taxpayers’ money. This should be treated as additional outgo as even while transferring NPAs from banks, only the estimated realisable value is transferred after a hefty haircut.

All in all, the new arrangement is only to camouflaging the reality of NPA.

The writer is a retired banker

Published on September 26, 2021

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