The Indian Banks Association (IBA) has submitted the proposal to set up a 'Bad Bank' to both the government and the Reserve Bank of India (RBI) on Tuesday, senior banking officials aware of the matter told CNBC-TV18.
The proposal was simultaneously sent to the union finance ministry, and copied to the department of financial services (DFS) and department of economic affairs (DEA) as well, added one of the people quoted above. RBI has also been sent the proposal for its consideration separately.
The buy-in of DFS would be critical to get public sector banks to participate in the 'Bad Bank', and that of DEA to get the necessary capital support, said an executive in the know. RBI's nod as the banking regulator would be equally critical, an IBA official said on the condition of anonymity.
CNBC-TV18 had earlier reported that the IBA, after receiving comments from several banks, had firmed up the proposal to house approximately 70,000-75,000 crore of bad loans at book value in the 'Bad Bank'.
As per IBA’s estimates, the 'Bad Bank' would require approximately Rs 10,000 crore of capital initially, which it proposes be fully provided by the government of India, added another senior banking executive.
“We are proposing three stages of resolution, including an Asset Reconstruction Company (ARC), Asset Management Company (AMC), and finally the Alternate Investment Fund (AIF). ARC will be owned by the Government of India- that is what we planning, AMC will be a professional body with participation from public and private sector, and the AIF where we want to create a secondary market for Security Receipts,” said an official directly in the know of the proposal.
The exact quantum of capital and amount of bad loans to be housed in the proposed 'Bad Bank' would only be finalised after discussions with the government and the RBI, said a person aware of the talks.
Bad loans across both public and private banks are proposed to be housed in this 'Bad Bank'. The total gross NPAs in the banking system are closer to Rs 10 lakh crore as of March 2020, as per various estimates.
However, a large part of these bad loans have been in default for a while and therefore are well provided for by banks. A senior bank official explained that Rs 70,000-75,000 crore NPAs at book value would be much larger in absolute numbers, if the provisions are taken into account.
For instance, he explained, Bhushan Power's Rs 40,000 crore (approx) exposure may only have a book value of about Rs 5,000 crore today, as most of it has been provided for.
Senior IBA officials CNBC-TV18 spoke to said that while the proposal has been submitted, it may take a while before the 'Bad Bank' takes shape after taking all comments and feedback into consideration.