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Saturday, February 24, 2024

Bad Bank is a good move

Aggregate deposits of Bharat’s Scheduled Commercial Banks (SCBs) rose 11.9 per cent YoY during 2020-21 (it was 9.5% in 2019-20), but they have moderated during 2021-22 so far, growing by 9.7 per cent by June 4, 2021.

Current account and savings account (CASA) deposits grew at a faster pace than term deposits, possibly reflecting the attitude of the people to save money for the rainy day by holding more liquid assets in the highly uncertain pandemic situation.

During 2020-21, bank lending increased by 5.4 per cent (y-o-y, it was 6.4% in 2019-20), which was the lowest in the last four financial years and it remains subdued in Q1:2021-22 (up to June 4). During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$ 1.93 trillion by FY20. According to the RBI, bank lending stood at 108.79 trillion (US$ 1.46 trillion) and bank deposits stood at Rs. 155.14 trillion (US$ 2.08 trillion), as of July 16, 2021.

The Non-Performing Assets (NPAs) of commercial banks recorded a recovery of Rs. 400,000 crore (US$ 57.23 billion) during the last period FY 16-FY20 including record recovery of Rs. 156,746 crore (US$ 22.42 billion) in FY19. Banks’ total gross NPA reduced to 8.2% at the end of March 2020 from 9.1% in March 2019 mainly due to write-offs.

The gross non-performing assets (GNPA) and net NPA (NNPA) ratios of SCBs remained stable during the second half of 2020-21, amounting to 7.5 per cent and 2.4 per cent respectively in March 2021. On the other hand, special mention account (SMA) ratios deteriorated.

The overall provisioning coverage ratio (PCR) increased from 66.2 per cent in March-2020 to 68.9 per cent in March 2021. The provisioning coverage ratio (PCR) – the proportion of provisions (without write-offs) held for NPAs to GNPA – increased from 66.2 in March 2020 to 68.9 per cent in March 2021, primarily due to a relatively higher decline in GNPA. 

SCBs’ return on assets (RoA) and return on equity (RoE) maintained a positive uptrend through 2020- 21 and their capital to risk-weighted assets ratio (CRAR) improved by 130 bps year-on-year from 14.7 per cent in March 2020 to 16 per cent in March 2021.

Stronger capital positions of the banks have positioned them on a better platform to finance the needs of productive sectors of the economy. The positive news is that as per the International Monetary Fund (IMF), after a contraction of –4.3 percent in 2020-21, the global economy is projected to grow at 6 percent in 2021-22 before moderating to 4.4 percent in 2022-23 and 3.3 per cent over the medium-term.

Bharat’s economy is expected to grow by 8.3% in 2021-22. As a result of fiscal and monetary support measures, banks’ funding costs and lending rates have declined to historical lows in Bharat.

Agriculture and personal loan books remained bright spots and recorded double digit growth in March 2021. The share of large borrowers in the aggregate loan portfolio of SCBs stood at 52.7 per cent in March 2021, but they accounted for a share of 77.9 per cent of the total GNPAs (73.5 per cent in September 2020).

One must admit that post liberalisation, Bharat has managed its banking sector reasonably well despite several global financial issues and crisis.

Gulf war and oil crisis in 1990 followed by US invasion of Iraq added to Bharat’s BOP Crisis in 1991. By June 1991, Bharat had less than $1 billion foreign reserves, just about enough dollars to meet about three weeks of imports. This compelled Bharat to initiate economic reforms out of compulsion though not by choice.

Bharat became wiser post 1991 BOP Crisis and could ward off the impact of Asian financial crisis in 1997-99 (Thailand, South Korea, Indonesia were the most affected countries followed by Hong Kong, Malaysia and Philippines.) Bharat could also successfully manage the impact of US subprime crisis in 2007-08.

In the recent past (starting from 2015) RBI ensured that the banks cleaned up their balance sheets and ramped up the loan provisions. “The reality is, there is a clean-up which we started, which is underway, which needs to be completed fast. The recapitalisation has been done, but it also has to be done in the non-bank financial sector which is ceasing up and you need to clean-up, get the financial system going again if you want stronger growth,” said Dr. RaghuRam Rajan , Ex RBI Governor on 31st October, 2019 (In 2019 IL&FS and DHFL both NBFCs witnessed crisis). 

RBI in its Financial Stability Report, July 2021 says-

  • contagion risks due to failure of banks have ebbed. On the other hand, contagion risks associated with the failure of NBFCs and HFCs remain significant, pointing to the need for continued vigilance to signs of incipient stress.
  • NBFCs were the largest net borrowers of funds from the financial system, with gross payables of Rs. 11.69 lakh crore and gross receivables of Rs. 1.86 lakh crore as at end-March 2021. The share of funding by SCBs grew substantially in Q4:2020-21 while that of AMC-MFs and insurance companies dipped.
  • Housing Finance Companies (HFCs) were the second largest net borrowers of funds from the financial system, with gross payables of Rs. 6.93 lakh crore and gross receivables of Rs. 0.72 lakh crore as at end-March 2021.

While agricultural and retail portfolios are showing a healthy trend, banks must be cautious with respect to their exposure to NBFCs and HFCs as rightly advised by RBI. The total size of top 100 willful defaults rose 5.34% in FY20 from Rs 80,344 crore as of March 2019, to Rs.84,632 Crs according to data shared by RBI in response to an application under the Right to Information (RTI) Act, which is also a matter of concern.

Bad Bank

The Reserve Bank of India on 4th October, 2021 issued license for the National Asset Reconstruction Company Limited (NARCL), following which toxic assets worth Rs. 2 Lakh crore of the banks (worth Rs.500 crore each) will move to the NARCL in a phased manner wherein toxic assets worth Rs.90,000 that are fully provided in the banks’ books will be transferred to NARCL in phase I.

A 15% cash payment would be made to the banks by NARCL based on some valuation and the rest i.e., 85% will be given as security receipts. Under the proposed mechanism, the NARCL will acquire assets by making an offer to the lead bank. Private sector asset reconstruction (ARCs) firms may also be allowed to outbid the NARCL.

Separately, public and private lenders will join together to set up an India Debt Resolution Company (IDRC) that will manage these assets and try to raise their value for final resolution. PSBs and public FIs will own 49 per cent of IDRCL (and the rest by the private sector lenders), tasked with the resolution and restructuring of bad loans bought by the NARCL.

In a way IDRCL is a step-down entity of NARCL that will be entrusted with the singular task of managing and turning around the bad loans taken over by NARCL from SCBs.
Once the NARCL and the IDRC have finally managed to achieve a turnaround of the bad loans the, preferably as a going concern and not through liquidation proceedings, the balance 85% held as security receipts would be given to the banks.

The government will extend a back-stop facility that will cover the gap between the realized value and the face value of those receipts, and this will hold good for only five years.

The current IBC (Insolvency and Bankruptcy Code) mechanism is still suffering from teething problems and has lot of issues that need to be ironed out. The overall recovery rate under IBC is very low with heavy haircuts amounting to 95% and there is delay in resolution process with more than 71% cases pending for more than 180 days which unfortunately defeat the very basic objective of enacting the IBC.

Therefore, setting up of NARCL to transfer the portfolio of bad loans of the SCBs is a good move and the proposed setting up of IDRC as a stepdown entity of NARCL to manage and turn around the bad loans is also equally a very good move by the government. This will enable the SCBs to transfer the bad loans on an ongoing basis to NARCL and retain quality assets portfolio in their balance sheets.

While the existing IBC Code is meant for resolving the insolvency accounts in a time bound manner, the bad loans bank is aimed at managing those bad loans and turning them around as viable entities.

Though, this a good policy decision its efficacy will depend on how both the institutions viz., NARCL and IDRCL will work in synergy and deliver the results in a time bound manner. If this move is proved to be successful, then one can say that Bharat’s banking system has found a long-lasting solution to resolve the bad loans at last. We must wait for at least 5 years before coming to such conclusion.


  1. Financial Stability Report, July 2021 by RBI.
  2. dated 16th September, 2021.

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Dr. B.N.V. Parthasarathi
Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 16 years of teaching, research and consulting. 200 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 38 short stories 50 articles and 2 novels published in Telugu. Email id: [email protected]


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