The article noted that if the logistical and financial challenges are carefully navigated, experiments with centralised bad banks can have more hits than misses.
The creation of a bad bank at the current juncture may prove helpful in reducing banking stress and kick-start the credit cycle, the Reserve Bank of India (RBI) said in an article published as part of its bulletin for February 2022. The article hailed the mechanism of including existing ARCs in the bidding process before asset transfers to the NARCL as a strong design feature. The article noted that if the logistical and financial challenges are carefully navigated, experiments with centralised bad banks can have more hits than misses.
“While it may be unfair to hail them as a universal antidote to deal with financial stress, they have proven to be a worthwhile exercise when armed with conducive institutional frameworks,” the article said, adding, “Experience of international best practices suggests that the NARCL (National Asset Reconstruction Company) in India is likely to serve as a time-efficient mechanism, while reviving investor interest in primary as well as secondary markets for stressed assets and SRs (security receipts), respectively.”
The NARCL was operationalised in late January 2022. The ARC will work in tandem with asset manager India Debt Resolution Company (IDRCL) on the terms of a principal-agent relationship as the RBI had earlier expressed its reservations about the originally-envisaged dual structure.
Going forward, continued commitment, professional staff and transparency in operation will help in making the exercise cost- and time-effective. At the same time, care needs to be taken to ensure that fresh slippages are arrested, and bank balance sheets are strengthened to avoid future build-up of stress, the article said.
It observed that certain features of the NARCL closely resemble successful models adopted elsewhere and may prove helpful in reducing the non-performing asset (NPA) stress. The establishment of the NARCL to acquire and consolidate stressed assets, along with the IDRCL to manage these assets by engaging market professionals and turnaround experts, is similar to the mechanism followed in Malaysia, which proved highly successful in resolving its stressed assets, the article said.
The article further observed that the joint structure of ownership of the NARCL by state-owned and private banks does not put immediate strain on the government’s limited resources.
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