India may face hurdles in creating a bad bank

The move to create a bad bank may hit a wall, as the banking regulator and the government, which is expected to sponsor it, are unlikely to accept two key proposals that the bankers’ lobby group has made.

The Indian Bankers’ Association wants to transfer accounts where fraudulent activities have been detected to the new entity that will hold their risky assets. It is also proposing to sell bad loans at book value to the asset reconstruction company.

As per the proposal submitted to the government and the Reserve Bank of India, fraud-hit accounts could be considered on a case-to-case basis, with approval from the regulator, to sell to the band bank. However, lenders who sell these loans will have to deal with all inquiries relating to fraud investigation.

Current rules don’t allow sale of such loans. Banks cannot sell bad loans that have originated fraudulently or have been classified as fraud as on the date of a planned sale, the RBI had said in an April 2011 communication to all scheduled commercial banks.

Banks have a plan to transfer Rs 70,000 crore of bad assets to the proposed ARC. As per data with the finance ministry, between April and December 2019, banks and financial institutions had reported frauds worth Rs 1.43 lakh crore.

Another bone of contention is the transfer of assets to the bad bank on the book value net of minimum regulatory provisions. This, banks say, would avoid time-consuming valuation process and due diligence. But, even ARCs don’t buy bad assets from banks at book value.

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