Credit easing: To finance the growth cycle, a bad bank and a DFI

Non-performing assets (NPA) expected to increase in the wake of the economic slowdown induced by the pandemic, Union Minister of Finance Nirmala Sitharaman announced on Monday the creation of an asset reconstruction company / asset management company (ARC / AMC) – commonly known as “bad bank”- to clean the books of the banks.

Sitharaman also proposed a Development Finance Institution (DFI) to enable long term financing worth Rs 5 lakh crore in 3 years for infrastructure projects.

The purpose of a “bad bankIs to park bad assets of commercial banks and sell them later at a reduced price in the market. This will help clean up the balance sheets of commercial banks. A good part of the gross NPA totaling Rs 899 803 crore in March 2020 should be transferred to the “bad bank”.

The move is a relief for banks affected by the surge in low-quality assets and the slow withdrawal of loans amid the pandemic. But several experts issued a note of caution, saying the move would encourage banks to continue their “reckless lending practices”.

“The CRA’s proposed buyout of stressed assets from banks will help banks free their books of bad debt and thus free up more funds for loans. Also, it will help get better value for the asset by aggregating debt, ”said Padmaja Chunduru, Managing Director and CEO of Indian Bank.

The government and the RBI are concerned about an increase in bad debts, as many borrowers are expected to delay repayments following the economic downturn. Banking sector APMs are expected to reach 13.5% of advances by September 2021, compared to 7.5% in September 2020 in the baseline scenario.

Finance Minister Nirmala Sitharaman presented the first digital budget to parliament on Monday. (Express photo by Praveen Khanna)

The finance minister has not announced a formal structure for the proposed “bad bank”. But banking sources say the government is likely to fund the institution with the participation of public sector banks. However, it is unlikely that private banks will join the structure in the first place. “The creation of an ARC / AMC to manage stressed assets can be developed over the years and transformed into a larger entity,” said Waqar Naqvi, CEO, Taurus Mutual fund.

The banking sector, led by the Association of Indian Banks (IBA), submitted a proposal last year to create a “bad bank”, offering a contribution in equity from the government and commercial banks. The proposal was based on an idea put forward by a panel led by former PNB chairman Sunil Mehta on faster resolution of stressed assets in public sector banks.

IBA President Rajkiran Rai G said: “Incidentally, IBA had proposed the creation of a bank that was in arrears during the pandemic as the banking sector expected a surge in stressed assets. Bad debt reduces provisioning needs and improves banks’ ability to lend to productive sectors of the economy to stimulate growth.Rai is also Managing Director and CEO of Union Bank of India.

Sitharaman and Anurag Thakur speaking to the press after the budget presentation

Regarding DFI, Sitharaman said: “A professionally managed development finance institution is needed to act as a provider, catalyst and catalyst for infrastructure finance. Accordingly, I will present a bill to set up a DFI. The ambition is to have a loan portfolio of at least Rs 5 lakh crore for this DFI in three years.

The proposed DFI will be used to finance social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP), which was launched with 6,835 projects and expanded to 7,400 projects. About 217 infra projects worth Rs 1.10 lakh crore have been completed.

A bill for the establishment of a DFI – the National Infrastructure and Development Finance Bank Bill, 2021 – has been entered for the current budget session of Parliament.

The first DFIs, like ICICI and IDBI, then turned into universal banks to access public deposits. But with difficulties for banks to finance long-term projects and given the general decline in sub-long-term financing after the collapse of IL & FS, the need arose to set up a DFI supported by the government.

The NIP high-level working group had previously recommended that the capacity of banking and financial institutions, including IIFCL and SBI, be strengthened to provide long-term infrastructure finance.

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