Given the large overwhelming non-performing assets in India’s financial services ecosystem, there has been a strong suggestion by the ministry for a one-time clean-up via a “bad bank” Asset Reconstruction Company (ARC), as announced in this year’s union budget.
This comes at the backdrop of immense losses being suffered by the public banks who try to recover their bad loans through some privately owned ARC. ARC in some cases, unjustly buys the bad loans at huge discounted prices from the public bank who already under the burgeoning bad loan crisis, acquiesce to their unjust bidding.
For the escalating bad loan crisis of India, ‘Bad Banks’ is the solution that has been discovered by the Indian authorities. Bad Banks will be the asset reconstruction company that will not be owned by a single group or an owner but will be likely owned by a group that includes government , private investors and the banks themselves.
To accomplish the initiative, nine banks and non-bank lenders, including the state bank of India, bank of Baroda and Punjab national bank are coming together to jointly invest rs.7,000 crore of initial capital in the proposed bad bank.
Reportedly, banks with the highest stressed assets or highest NPA ratio will be selected as the shareholders of the proposed bad bank. Other investors in Bad Bank include large state-run institutions namely, Canara bank, Union bank and bank of India respectively. The other stakeholders include state owned Power Finance Corp (PFC) and Rural Electrification Corp (REC).
It has been reported that all the 11 shareholders will hold just above 9% each initially and thus no single shareholder will have more than 10% in promoting stake. As the state plans to join in more shareholders, it will further dilute the stakes of the already existing shareholders.