About five years ago, the stressed assets management team was busiest unit across most banks. Now, those handling compliance and risk management work round the clock. It’s a welcome change. Seen from that lens is the RBI’s discussion paper floated on securitisation of stressed assets framework.

It’s a progressive step towards becoming future ready, and indicates commitment towards weeding out legacy bad loans from the banking system to free up the bandwidth in terms of capital and manpower. We need to channelise both productively. To that effect, the draft paper’s suggestion of creating a mechanism to securitise stressed assets (not necessarily the non-performing ones) to any entity, and not just to an asset reconstruction company, may broaden the options available to banks to reduce the dud loans in the balance sheets.

But sample this: in 2016, 10.7 per cent of total bad loans in the banking system were sold to ARCs. That reduced to 3.2 per cent in 2022, according to RBI data. If the intention is to build a battleground against bad loans, we must introspect why only fewer sale to ARCs have happened lately.

For one, most of today’s legacy bad loans are not necessarily because of operational failures. Many, especially in the power and infra space, were funded, based on questionable business projections and/or have faced investigation by central agencies. When banks have taken 100 per cent provisioning towards these assets and the possible upside from them is very questionable, it’s a situation of stalemate. NARCL was conceptualised to address this, but its not had much headway either. Secondly, ARCs have become a parking option for banks and front-ending vehicle for the interested investors. This is an oversight and structure related issue, and whether operational as ARCs or otherwise, any amount of regulatory tightening cannot address this issue. It could further distance interest from the stressed assets space.

Thirdly, selling down an asset invariably is just substituting the bank with another entity for the exposure. Unless the person taking over the bad loans has majority say on it, both in value and in volumes terms according to the requirements of Insolvency and Bankruptcy Code, it will once again lead to stalemate.

We could create multiple options in the stressed assets resolution space, give the resolution specialists fancy names, including that of a resolution manager as suggested by the draft paper, and present an extremely sweet deal whether on the retail or corporate side, but it would still just be old wine in new bottle. Without addressing the root cause of why ARCs didn’t live up to the initial euphoria, we shouldn’t end up creating more stress to handle stress.