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Tue, Feb 23 2016. 10 12 AM IST

A bad bank for India’s toxic debt an all-round bad idea
Some nationalization of bank losses is unavoidable, but priority should be speedy privatization of state-run lenders, not creation of
(another) bad bank
Singapore: Desperate times call for ludicrous measures. Spooked
by the relentless surge in bad loans in India’s largely state-run
banking system, officials in New Delhi are floating a new idea: the
creation of a government-backed bad bank.
Since the concept is getting bandied about ahead of the 29 February
Union budget, hapless investors are being forced to suspend
disbelief and start hoping for an Indian version of the US’s 2008
Troubled Asset Relief Programme. After losing 44% its value over
the past 12 months, a gauge of India’s government-controlled banks
has risen 5% the last four trading sessions. That compares with a
2.6% increase in the benchmark Nifty index.
The expectations are misplaced. It’s one thing to make broken
private balance sheets whole by shifting the burden of potential
Separating lenders from the consequences of their past
losses to taxpayers, but how does one further socialize losses for
decisions, without imposing new rules on them for the
which taxpayers are already on the hook? Cumulatively, state-run
future, will merely perpetuate India’s culture of weak lending
Indian banks lost `10,800 crore in the three months to 31 December,
discipline. Photo: Pradeep Gaur/Mint
according to Fitch Ratings. If the March quarter proves to be just as
miserable, almost 90% of the additional capital the government
pumped into lenders this year will be used to absorb a six-month
loss. Until the carnage stops—and that might take several quarters—private capital won’t touch these banks.
Annual tax revenue of India’s central government - $134 billion
A TARP-like solution could end up making matters worse. Move the toxic assets into a new financial institution at near their current book
values, and the troubled lenders might be able to access capital from the market. But the bad bank’s heavy losses would still need to be
made good by taxpayers. Force banks to get rid of soured debt at a deep discount, and the bad bank might become an attractive assetholding company. Even so, those lenders divesting the non-performing loans will be taking a big one-time hit. And they’d need a pretty hefty
equity infusion—courtesy of the taxpayer—just to maintain a minimum tier 1 capital ratio of 7.5%.
Standard and Poor’s recently warned of “multiple-notch downgrades” if capital falls short of this minimum regulatory requirement.
Considering just how close some state-run banks are to the threshold, a botched bad-bank plan could be downright dangerous.
Indeed, the reluctance to swallow an upfront loss and take a hit on capital is one of the main reasons Indian banks haven’t sold enough of
their bad debts to existing private asset reconstruction companies. The other is that the ARCs themselves are undercapitalized.
Separating lenders from the consequences of their past decisions, without imposing new rules on them for the future, will merely
perpetuate India’s culture of weak lending discipline. It would be nice if instead of toying with the idea of a bad bank, the government used
its annual budget to do two things simultaneously.
One, inject in one fell swoop something like $7 billion of fresh capital—double the current fiscal year’s allocation—to allow lenders to
recognize more of their stressed loans as non-performing. That way they can make provisions against them and pull their loan-loss
reserves up to at least 70% of soured debt, at which point investor concern would be allayed to some degree. At present, none of the staterun banks meet that requirement.
Two, listen to Arundhati Bhattacharya, chairman of the largest public sector bank, State Bank of India, and announce a bold plan to reduce
the government’s shareholding in these lenders to below 51%. Politically, it will be a hard sell. Unionized bank employees will be up in
arms. But without such a roadmap, an onerous chunk of the $150 billion or so of capital that Indian banks require will have to come


2/24/2016 A bad bank for India’s toxic debt an all-round bad idea . Not the creation of (another) bad bank. Some nationalization of bank losses is unavoidable. at amukherjee@bloomberg.net http://www.html?facet=print 2/2 . That’s practically impossible. considering the entire annual tax revenue of the central government is about $134 billion.Print View .livemint. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Livemint primarily from taxpayers.com/Opinion/2XiqixOXPN8ZTJryQhw0EP/A-bad-bank-for-Indias-toxic-debt-an-allround-bad-idea. but India’s priority should be speedy privatization of the nation’s lenders.net To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.