A proposal by India’s central bank to set up new private or state companies that would buy up bad debt from lenders was met with widespread scepticism by bankers on Wednesday, who warned the plan would add more complexity and delay any restructuring.
Banks in India have record stressed loans of $133 billion, or 12.34 percent of their total loans, as of last September, and economists say dealing with them has become imperative given the load is constraining lending and delaying much needed private investment.
Reserve Bank of India Deputy Governor Viral Acharya, in a major speech to bankers on Tuesday, proposed the creation of a private-based agency or a government asset management entity to buy and restructure the soured loans.
But in a sign of the difficulties the RBI would face, bankers expressed opposition to the new proposal, saying it would take too long to agree on how the scheme would work and then risk further delays as the institutions are set up.
Instead, bankers urged the RBI to stick to an existing framework drafted by previous Governor Raghuram Rajan, which forces banks to first admit to the true extent of bad loans they hold and then gives them flexibility to restructure them, including by selling them off to private companies.
“Creating an institution itself is not an easy task,” said a senior banker at a state-run lender, who declined to be identified commenting on the RBI.
“The better way would be to use the existing infrastructure,” he added.
Critics of the existing RBI framework for restructuring bad loans have warned it leaves too much discretion to banks to solve the problems – a view echoed by Acharya, who called for a new approach of “tough love” for lenders.
But the creation of a so-called “bad bank” also has its own critics, including Rajan, who believed such an approach would simply shift the soured debt from banks to another firm, and said the focus needed to be on how to restructure the bad loans.
Ultimately, much will depend on the government’s stance.
The Finance Ministry appears open to Acharya’s approach, having already proposed in January setting up a bad bank to buy soured loans from lenders and then restructure them, including by converting the debt to equity.
But even if the government and the RBI agree on creating an institution to deal with bad debt, the structures differ under the existing plans, and the differences would need to be ironed out.
Acharya was careful to avoid saying his proposal would create a bad bank, saying he wanted institutions with a narrow mandate to deal with soured loans, while warning that an unduly broad mandate risked creating “mission creep.”
Instead, he said his speech marked the start of fresh discussions on a topic that has cast a shadow over the economy.
“There are many details to work out. But I hope this provides a start,” Acharya said.