MUMBAI Feb 8 India's central bank deputy
governor on Wednesday joined the debate over creating a
so-called "bad bank" to handle record sour assets in the
nation's banks, saying it could help if "designed properly".
Banks in India had record stressed loans of $133 billion, or
12.34 percent of their total loans, as of last September.
About two dozen state-owned lenders, which own nearly 70
percent of India's banking assets, have an even higher
stressed-loan ratio of 15.88 percent, according to data compiled
by India's central bank.
In its economic survey released on Jan. 31, the finance
ministry suggested setting up a bad bank that it said could be
used to buy bad loans from the banks and deal with them through
methods including conversion of debt to equity.
While the idea is not new, critics including former Reserve
Bank of India Governor Raghuram Rajan have questioned the need
for it at a time when more than a dozen already existing
companies buying bad loans have yet to make a significant dent.
"I don't think a bad bank just by itself will necessarily
work, I think it has to be designed right," Viral Acharya, one
of the four deputy governors in the RBI, said on Wednesday.
"The big piece of the problem is can you get the bank to
sell the assets at the right price to (asset reconstruction
companies) and private investors who want to come in ... I think
that's going to be key," Acharya, a former New York University
economics professor who joined the RBI last month, told a news
conference after the central bank held rates.
"We're going to be thinking about what kind of design issues
might help with that. But we think it is something designed
properly could help."
One of the reasons cited for lower than expected bad loan
purchases by asset reconstruction companies is the high price
expectations by the banks, analysts say.
A slow legal process - India just last year enacted a
bankruptcy law - is another factor that has been blamed for
hindering the resolution of the bad loans.
Including "unrecognised" problem debts, total stressed loans
in the system could be as high as $191 billion, or 16.6 percent
of the total loans as of September, the finance ministry has
estimated. For the state-run banks, nearly 20 percent of the
loans are stressed, it said in the economic survey.
($1 = 67.2800 Indian rupees)
(Reporting by Devidutta Tripathy; Editing by Tom Heneghan)