Bad Bank: For Restructuring the Bad Loans – By CS Anchal Jindal

CS Anchal Jindal
Senior Associate, Areion Group

Bad Bank: For Restructuring the Bad Loans

Reserve Bank of India (hereinafter referred as “RBI”) in its Financial Stability Report for January 2021 has estimated that considering the current market and economic scenario, the banks Gross Non-Performing Assets (hereinafter referred as “GNPA”) may rise sharply to 13.5% by September 2021 and may also escalate to 14.8% which is nearly double of GNPA for FY 2019-20 which stood at 7.5%. Also out of all the banks, State-Run Banks are being the worst-affected with their GNPA expected to increase to 16.2% by September 2021 as compared to their GNPAs at 9.7% in September 2020.

The loads of NPA accumulating in the economy are a major concern for the financial framework and for the general economy overall since rising NPAs will make trouble upon the banks to meet their higher capital necessity to conquer the effect made by the bad credits. Likewise COVID-19 has given an additional shock on the bank accounting reports followed by the consequent interim hiatus of approximately one year on the banks from proceeding under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as “IBC”) route against the corporate debtor making bad the rendered loan amount.

Considering the existing stress scenario in the Indian economy, Union Finance Minister Mrs. Nirmala Sitharaman in her budget speech on 1st February 2021 announced the concept of “Bad Bank” as a measure to clean up the bank books. Bad Bank means an entity set up in the form of Asset Reconstruction Company and Asset Management Company to consolidate and take over the existing stressed debts of the Indian banking system and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization. The new framework of Bad Bank upon its successful implementation will provide a major boost and financial stability to the Indian banking sector and will aid in cleaning up the bank’s balance sheet.

The idea of Bad Bank was proposed by Indian Bank’s Association to the government in last year. As per the arrangement proposed by the government, bad loans over and above Rs. 500 Crores are expected to be brought under the Bad Bank for their restructuring and overall stressed resources worth Rs. 2.25 Trillion are proposed to be made good under the said framework. The government will not be having any direct participation in the proposed entity in the terms of funding or management control and rather same will be looked upon by the commercial banks from public as well as private sector. The functioning of this new entity will be in consonance with the provisions and process prescribed under the IBC. The Bad Bank is expected to follow the 15:85 Model in restructuring the distresses assets of the banks i.e the banks will be getting 15% upfront payment as cash and remaining 85% as security receipts.

Dr. MS Sahoo in one of its interview featured in Financial Express stated that the “Bad Banks will specialise in the resolution of stress which in turn will build business acumen to distinguish between financial stress and economic stress and then adopt the right strategy to resolve the stress. It will also develop the professional capability to evaluate the feasibility and viability of resolution plans to approve the best of them. Further, the process of decision-making by the Committee of Creditors will be smooth as the Bad Bank will have in most cases the voting power as required for the decision. Thus, the Bad Bank will be better placed to use the IBC and this will improve outcomes from IBC processes.”

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