The government is exploring creating a bad bank, all other options: Secretary of the DEA


New Delhi: The government is exploring all options, including creating a bad bank, to improve the health of the country’s banking sector, Economic Affairs Secretary Tarun Bajaj said on Friday. He also said that the government has recapitalized public sector banks and continues to inject capital as required.

“We are looking at various options, including the option you mentioned (bad bank), and it is still in the works … The RBI has been asking us, and we too feel we need to recapitalize. We have recapitalized heavily and this year as well, we have saved some money for the recapitalization so that the commitment is there … ”, he said.

Bajaj was responding to a question on whether the government would consider the creation of a bad bank as a unique measure to reduce the burden of non-performing assets (NPAs) on public sector banks.

There have been differences of opinion about creating a bad bank.

In June, chief economic adviser KV Subramanian said that creating a bad bank may not be a powerful option to address the problems of unprofitable assets in the banking sector.

Subramanian had also said that when a bank sells bad loans, it has to get a haircut because when 100 rupees goes wrong, the actual amount that can be expected is less than 100 rupees and that leads to a haircut.

“So when the bank has to sell that loan to an ARC (Asset Reconstruction Company) or a new institution that is created, in that case, it has to take a haircut. that affect the sale of loans.

“So until that particular issue is addressed, creating a new framework may not be as powerful in addressing the problem,” he had said.

Banks currently sell their bad loans to ARCs according to the prudent rules of the Reserve Bank of India.

Even the president of the industry body IIC, Uday Kotak, had said that creating a bad bank to deal with the problem of setting up NPA is not a good idea and will not produce the desired results unless some key aspects are addressed such as transparency and recovery rate.

However, former RBI Governor D Subbarao had defended the creation of a bad bank saying that it was not only necessary, but inevitable in the current circumstances, when NPAs are likely to skyrocket and much of the resolution will have to take place outside the framework of the IBC. .

To help the MSMEs sector, Bajaj said on Friday that the government has announced a 100 percent guarantee for smaller industries so that banks can lend to them.

Last week, the Ministry of Finance said that banks have sanctioned loans worth Rs 2,05,563 crore to about 81 lakh accounts under the Rs 3-lakh crore Emergency Line of Credit Guarantee Scheme (ECLGS) for the MSMEs sector that was affected by disruptions caused by the coronavirus pandemic.

Of this 40 lakh, MSME accounts have received 1.58.626 million rupees as of December 4.

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