National bad bank is not a bad idea, says HDFC Bank's MD & CEO Aditya Puri

Aditya Puri, Managing Director and Chief Executive of the second largest private lender HDFC Bank, on Friday backed the idea of setting up a national bad bank, saying anything that can help resolve the perennial bad loans problem is welcome.

"I don't think a national bad bank is a bad idea. The Government and the regulators are coming up with various discussions as to how solve the issue relating to non-performing assets (NPAs) and that is necessary so that the banking system has the ability to do more.

"Bad bank is one of the ideas being discussed, there are other ideas like the Bankruptcy Code which should also help, we bankers are also working (on tacking NPA issue)," Puri told a panel discussion at the concluding day of the three-day annual Nasscom leadership forum in Mumbai.

It can be noted that almost 20% of the banking assets are stressed with the NPAs alone topping 13.5% as of the September quarter. While more than 70% of the system are with the state-run banks, over 90% of the stressed assets with them, leaving them starved of growth capital.

While its banks are starved of cash, the Government finances are not adequate to recapitalise them which was visible from the paltry Rs 10,000 crore for capital infusion into 24 state-run banks in the Budget 2018.

In fiscal 2017 and the previous year, the Government infused Rs 25,000 crore each in to these banks, while their demand is at least Rs 91,000 crore between the next two fiscal years, as per an India Ratings estimate in the core tier I capital alone to meet the stringent Basel 3 capital norms.

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For the system as a whole between fiscal 2015 and 2019, the banks need more than Rs 3.9 trillion for the banks to meet the Basel III capital norms. Of this Rs 1.8 trillion are only tier I core capital for the public sector banks.

While the idea of a national bad bank has been doing the rounds ever since the NPA issued ballooned out, one the most concrete banking for the idea came in the recent Economic Survey, which made a strong case for such an entity to address the festering twin balance sheet problem.

The Economic Survey called for creation of state-owned asset reconstruction company under the moniker of Public Sector Asset Rehabilitation Agency (PARA), as it noted that at least 13 of the 24 PSU banks account for around 40% of total stressed loans, Chief Economic Adviser Arvind Subramanian said in the survey.

Subramanian has been a votary of bad bank to be funded by the RBI surpluses but the former RBI chief Raghuram Rajan opposed it citing an issue of moral hazard. 

On Thursday, Kotak Mahindra Bank Vice-Chairman Uday Kotak, too, had called for a national bad bank, saying the present state of the financial sector needed such an institution so that they banks could continue to oil a fast growing economy.

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"The stress in our banking sector must be eradicated to allow the system to lend to small businesses and other growing sectors of economy. And the present health of our public sector banks do not allow them to do so. Therefore a national bad bank is a good idea," he said in Mumbai last evening.

Kotak also called for consolidation of the public sector banks saying the economy did not need 24 public sector banks but needed a few strong ones.

Describing the PSBs as 'the 70% problem' (in reference to the over 70% market share of these banks) Kotak had wondered what was the need for so many state-run banks, which is the highest in the world only after China.

But Kotak was quick to warn that as and when we create a national bad bank the government must ensure that it had a good management and governance teams who could face the challenges.

"We need to have a very solid basis of transferring assets at fair price to the bad bank and then having a strong recovery team which can manage this well by being surgical, logical and ruthless," Kotak had said.

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