CII calls for the creation of several bad banks to buy bad loans

Budget 2021: CII recommended that the government create several bad banks.

Banks could see bad loans double despite signs of an improving economic impact from the Covid-19 pandemic, a report from the Reserve Bank of India’s Financial Stability and Development Board said on Monday. Banks’ gross non-performing assets (NPAs) can 7.5% increase in September 2020 to 14.8% in a severe stress scenario. Even in a baseline scenario, it could reach 13.5% by September 2021, the council said.

At the same time, the industry body Confederation of Indian Industry (CII), in its pre-budget memorandum 2021-22, recommended that the government create several dubious banks by allowing alternative investment funds (AIFs) to buy bad loans.

“The financial sector, especially the lending side, is a vital artery of the economy and its robust operations are a key pillar in India’s journey to a $ 5,000 billion economy. It is worth asking whether it is time to review the financial structure in a way that is comprehensive and capable of meeting the economic needs of the real Indian sector, ”CII said in its 2021-22 pre-budget memorandum.

“Until now, NPAs have largely been sold to Asset Reconstruction Companies (ARCs) only and especially not for cash consideration, meaning the sale price was not a ‘real’ sale ”since CRAs could pay through“ warranty receipts ”(RS). SR is basically an instrument in which payment is made only when a little money is collected – a kind of participatory note. Based on recent RBI data on outstanding SRs, the industry estimates the net recovery to be only around 10-12%. Exceptional SRs are Rs 1.46 lakh crore. This represents the “non-monetary” consideration received by banks against the sale of loans, ”CII said.

“The need of the hour is to increase the possibilities of realization ‘in cash’ against the sale of loans and to increase the possibilities of capital to compete for such loans in order to maximize the realization for the banks. The best way to do this is to open up the buy side and allow capital to flow clearly for the purchase of NPAs. AIFs and foreign portfolio investors (REITs) may be allowed to buy NPAs and compete with ARCs, ”added CII.

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