Revival of 'bad bank' idea: Government sets up committee to tackle bad loans

Piyush Goyal, the in charge finance minister in the absence of Arun Jaitley, announced at a press meet on Friday, June 8 that the government has constituted a committee of bankers and experts to look into the feasibility of setting up an ARC or an Asset Reconstruction Company, which would take over the NPAs (Non Performing Assets) of the public sector banks and introduce a mechanism for dealing with them.

Also known as a 'Bad Bank' in industry parlance, the ARC, in essence, deals with the existing bad loans of the banks and provides a mechanism for recovery of the outstanding dues including measures such as sale of stressed assets and a turnaround of the banks by placing professionals in charge of the process.

Indeed, this announcement was hailed by bankers such as Rajnish Kumar, Chairman of the country's biggest bank, SBI (State Bank of India), who pointed out that the creation of a Bad Bank would free up the bankers to focus on their core operations instead of firefighting the problem.

Having said that, not all are enthused by this idea, including the regular finance minister, Arun Jaitley, and the ex head of NITI (National Institute for Transforming India), Arvind Panagariya, who believe that instead of setting up a separate Bad Bank, the government, can instead, focus on strengthening the existing mechanisms under the Insolvency and Bankruptcy Act, that provides for more structured recovery of NPAs.

However, what all agree on is that the problem of NPAs must be tackled immediately in order to prevent a full blown banking crisis and hence, whether an ARC or a Debt Recovery Tribunal, the time is now to address the problem. Indeed, with gross NPAs touching 10.03 Lakh Crore or 11.2 percent of the advances, the government cannot drag its feet anymore as far as the resolution of the same are concerned.

Therefore, it is heartening to see some movement to address a long standing problem and which if unresolved, can dent the business friendly approach of the present government, and lead to investors triggering a flight of capital out of the country.