The experience of Danaharta – the Malaysian government-backed asset management company that purchased stressed assets from Malaysian financial institutions after the Asian crisis – provides pointers on how India could structure its own ‘Neelkanth’.
To put it mildly, our financial services ecosystem is in no position to fund our growth and investment aspirations.
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Banks are grappling with a large stock of stressed assets. Belying earlier hopes, their recovery and resolution are turning out to be a tortured process. The trust deficit around non-bank finance company (NBFC) assets continues. The health of the broader economy gives little room for comfort.
We need to break this sense of fear and despondency and reinvigorate the ecosystem.
First, perhaps we need an empowered, competent and poison-absorbing body – a ‘Neelkanth’ -- to quarantine stressed assets away from the ecosystem.
Second, even after taking away the stressed assets, the ecosystem will need deep structural reforms to break this cycle of churning out poison periodically.
In this note, however, we will limit ourselves to the modalities of a possible poison-absorber. Structural reforms are worthy of a separate debate by themselves.
Bad wine in a new bottle?
‘Neelkanth’ is a ‘bad bank’ idea that has been proposed (and shelved) before.
Some of the objections to a bad bank aren’t necessarily valid. Consider the objection that creating a bad bank is tantamount to throwing good money after bad.
Here are two rejoinders to that. First, between FY15 and FY19, the government has already pumped in Rs 2.5 trillion of capital into public sector banks. Second, of course, deep structural reforms have to be part of any solution set, and we still await them. In short, even without a bad bank, we are currently throwing good money into status quo and hoping for the best.
However, there are other valid questions around bad banks that need to be addressed.
The study of global parallels can be useful to address these questions. In particular, the experience of Danaharta – the Malaysian government-backed asset management company (AMC) that purchased stressed assets from Malaysian financial institutions (FIs) after the Asian crisis – provides pointers on how India could structure its own Neelkanth.
Putting together a poison-absorber
First, let’s acknowledge that Delhi needs to step in. The IBC route promises much in the long run. But since 2017, we are tying ourselves into legal and financial knots while grappling with our enormous stock of stressed assets. Private capital will not come in sufficient quantity into distressed debt until the IBC process settles down. We scarcely have the luxury of waiting till then.
Given this, drawing from the Malaysia Danaharta experience, here is how our own government-led Neelkanth might operate.
Given the carrot of participation in the recovery upside, alongside the stick of higher provisions, FIs would be inclined to dispose of their stressed assets to Neelkanth.
Other learnings from Danaharta
There are other aspects of the Malaysia Danaharta experience worth emulating.
Bad bank not a bad idea
We need a way out of the ongoing morass in our financial services ecosystem.
One start could be to revive the idea of a bad bank – a ‘Neelkanth’ – to quarantine and absorb our stock of poisoned stressed assets. Past objections around bad banks can perhaps be addressed, in particular by drawing lessons from the Malaysia Danaharta experience.
Ananth Narayan is Associate Professor-Finance at SPJIMR.
Read his columns here.
First Published: Jul 29, 2019 12:35 PM IST