Lending reboot: Bad Bank may absorb Rs 2 lakh crore NP As

NEW DELHI: India' s growth is set to further accelerate on the back of the path breaking plan to set up a' Bad Bank ', which is expected to absorb Rs 2 lakh crore worth of non-performing assets (NPA).

Accordingly, the process is expected to c lean up banks' books and allow them to lend more freely.

According to the Finance Ministry's Chief Economic Advisor Krishnamur thy Venkata Subramanian, the crucial reform measure in the sector will pave the way for a stronger banking sector.

In a conversation with IANS, he said the Budget proposal on ' Bad Bank' is really critical for the sound health of the financial sector as it would clean up the balance sheets of banks while also giving them opportunity to raise additional capital from the market to step up lending.

"... in excess of Rs 2 lakh crore of bad assets are actually likely to be transferred to the bad bank ," he told IANS.

The CEA said that with banks provisioning for bad assets rising to 85 per cent against 15 per cent f or bad assets, a lot of hit that banks would have otherwise taken in these toxic assets have already been covered.

With ' Bad Bank' coming into the pictur e, banks would not onl y g et higher realisation for bad assets but also fr ee up their ca pital tha t could also help in augmenting ca pital by tapping market with shar e offering.

According to the RBI's biannual financial sta bility report (FSR), bank NP As may rise to as high as 14.8 per cent in one year in case of a se vere stress scenario, from 7.5 per cent as of September 2020 or c lose to Rs 7.5-8 lakh cr ore. T he RBI's stress test co vers the first six months of the cur rent fiscal ended Mar ch and projects a baseline scenario of g ross NPAs (GNPAs) a t 13.5 per cent.

So, e ven if the bad bank picks up an Rs 2 lakh cr ore tab, the str ess in the banking sector would be relieved by a significant margin.