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A solution to India’s bad loans problem has continued to elude policymakers. While the government will be interested in resolving the issue because the banking sector’s good health is vital for the economy, it is also the majority owner of public sector banks. That puts the direct onus on it to recapitalise banks when their balance sheets totter due to the unbearable weight of bad assets.
Enter the National Asset Reconstruction Company, an entity which will take over a large portion of the stressed debt from banks amounting to Rs 2 lakh crore, pay 15 percent in cash and 85 percent in the form of security receipts. The government is also providing a guarantee of Rs 30,600 crore on the security receipts issued by the bad bank.
If all works well, then bank balance sheets will turn healthier, they can focus on growing their business and their valuations should improve. The government’s bid to sell its stake in some of the banks it owns should also get a leg-up as the new owner will have lesser bad debt to deal with. But as past experience has shown, when the problem is a complex one, executing a solution is not that simple.
In today’s edition, we take a look at how multiple attempts at resolving the bad loan problem have achieved limited success. And, the idea of a national bad bank is not a new one. The global experience on this has been a mixed one. But India can benefit from lessons that have emerged from the experience of other countries which tried setting up a bad bank. Do read.
In another insightful article on the subject, we look at the implications of setting up of the NARCL for the banking sector, how it will work, which banks will benefit, how can the government benefit and given the dim experience of existing ARCs in resolving the NPA problem, why should one more make a difference and what is required for that to happen? Don’t miss it.
After reading both articles, cautious optimism is what one is left with, on the future of the NARCL and its ability to resolve a problem that has eluded a comprehensive solution till now.
Here are investing insights from our research team:
What else are we reading today?
Unpublished ECB inflation estimate raises prospect of earlier rate rise (republished from the FT)
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