Bad Government-Owned Bank Is More Capital Efficient, Can Dramatically Reduce Credit Charges: Report
The government that owns the proposed bad bank will not only be more efficient in terms of capital, but will also not have an impact on the budget figures, because otherwise it will have to continue to recapitalize the public lenders as they will be the biggest beneficiaries of the proposal bad bank, Bank of America Securities India said in a report.
Again, such a setup can reduce credit charges on banks by one-fifth in a worst-case scenario from the current 100%, the report added.
As of March 2020, banks’ net NPLs stood at 2.8% or Rs 2,89,500 crore, or 1.3% of GDP, according to the report.
That figure will rise dramatically to 13.5% by September, a two-decade high, given the impact of the pandemic on businesses and banks, according to the Reserve Bank of India.
In January, a central bank stress test showed that the gross PNAs of public sector banks could drop from 9.7% in September 2020 to 16.2% in September 2021, while those of private banks from 4. 6% to 7.9% and banks from 2.5% to 5.4%, taking the whole system doubtful debts to 13.5 percent by September of this year.
It is understood that the proposed Asset Reconstruction Company or ARC will be funded by state owned banks / FIs.
According to the report, the ARC offering to take over bad loans from banks offers an opportunity to improve asset quality when real lending rates fall.
But the question is who will fund it? If the state-run banks / FIs fund it, the ARC will largely take over their bad loans, which were 2.8% in March 2020. In this scenario, the banks would then transfer their NPAs against security receipts. issued by the CRA, he said.
But the brokerage’s in-house economists believe that a fully government-funded CRA will not only be faster to set up, but may also be more capital efficient.
More importantly, the capital charge on banks can drop to 0-20 percent from 100 percent now if these collateral receipts are issued by a fully owned Crown corporation, which will be effectively guaranteed by the state.
From a fiscal point of view this will not have an impact because anyway, the government has to recapitalize the banks at the end of the day, and therefore the potential fiscal impact is similar and it can easily dip into the revaluation reserves of the bank. RBI to recapitalize the banks in a tax neutral, liquidity-free transaction. , according to the report.
State funding can be faster and more capital efficient, he added.
ARC’s capital requirement will depend on whether it is required to maintain a CRAR of 9 percent RWA as applied to banks or 15% as applied to NBFCs.
If the government provides equity, it will have to recapitalize the write-offs anyway, either as the owner of the ARC or as the owner of the public banks. Moreover, it is not clear whether bank balance sheets can withstand the effects of a delayed recovery.
In any case, the government will end up implicitly guaranteeing the recapitalization of the PSBs at least.