Bad Bank Needs Capital, Pricing Mechanism: Fitch
‘A larger-scale bad bank with govt backing might have more success’
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.