Bad Bank Needs Cap­i­tal, Pric­ing Mech­a­nism: Fitch

‘A larger-scale bad bank with govt back­ing might have more suc­cess’

The Economic Times - - Markets: Beating Volatility - Joel.Re­bello@times­group.com

Mum­bai: The idea of a bad bank to deal with ris­ing stressed as­sets in In­dian bank­ing is a good one but un­likely to work with­out a mech­a­nism for pric­ing bad loans and cap­i­tal sup­port from the gov­ern­ment, global credit rat­ing agency Fitch said on Fri­day.

“A larger-scale bad bank with gov­ern­ment back­ing might have more suc­cess. How­ever, it is un­likely to func­tion ef­fec­tively with­out a well-de­signed mech­a­nism for pric­ing bad loans, par­tic­u­larly if the in­ten­tion is for the bad bank to be run along com­mer­cial lines and in­volve pri­vate in­vestors,” Fitch said in the re­port.

Fitch cited the eco­nomic sur­vey re­leased last month sug­gest­ing that 57% of the top 100 stressed debtors would need debt re­duc­tions of 75% to make them vi­able. Banks would re­quire ad­di­tional cap­i­tal to cover these haircuts taken dur­ing the sale of stressed as­sets. More im­por­tantly, the new bad bank would also need money to cover any losses in­curred dur­ing the res­o­lu­tion process.

Ear­lier this week, in his first pub­lic speech, Re­serve Bank of In­dia (RBI) deputy gov­er­nor Vi­ral Acharya said that banks have to deal with the record pile-up in stressed as­sets with ur­gency. He sug­gested a pri­vate as­set man­age­ment com­pany man­aged by spe­cial­ists look­ing for so­lu­tions within a fixed time frame or a na­tional as­set man­age­ment com­pany in sec­tors like power which are stuck with eco­nom­i­cally un­vi­able as­sets in short- to medium-term.

Fitch said banks would re­quire huge amount of cap­i­tal to get any plan go­ing. The rat­ing agency es­ti­mates that In­dian banks re­quire around $90 bil­lion in new to­tal cap­i­tal by fis­cal 2019 to meet Basel III stan­dards and on­go­ing busi­ness needs, much higher than the $10.4 bil­lion the gov­ern­ment ear­marked be­tween 2016 and 2019. As­set qual­ity prob­lems have put pressu- re on bank prof­itabil­ity. Fitch ex­pects the stressed-as­set ra­tio to rise over the com­ing year from the 12.3% recorded at end-Septem­ber 2016. The ra­tio is sig­nif­i­cantly higher among state-owned banks. “A bad bank might pro­vide a way around some of the prob­lems that have led In­dian banks to favour re­fi­nanc­ing over re­solv­ing stressed loans. For ex­am­ple, large cor­po­rates of­ten have debt spread across a num­ber of banks, mak­ing res­o­lu­tion dif­fi­cult to co­or­di­nate. The process would be sim­pli­fied if the debt of a sin­gle en­tity were trans­ferred to one bad bank.

This could be par­tic­u­larly im­por­tant in In­dia's cur­rent sit­u­a­tion with just 50 cor­po­rates ac­count­ing for around 30% of banks’ stressed as­sets,” Fitch said.

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