The Sunil Mehta committee has backed the government plan for a bad bank to fight the bad loan menace by setting up an asset management company/asset reconstruction company, according to sources.
In the report submitted to the finance ministry on Monday, the committee has suggested that the proposed bad bank appoint experts from outside to tackle the stressed assets issue that has crossed 11.6 per cent of the system and rely more on the cash route rather than the issuing security receipts, sources told PTI.
The committee, which has SBI chairman Rajnish Kumar and Bank of Baroda head BS Jayakumar as members, also favours banks and overseas investors funding the bad bank and not the public funds or the a portion of the forex reserves as had been suggested by some quarters.
On June 8, finance minister Piyush Goyal had announced a committee under the chairmanship of Punjab National Bank non-executive chairman Sunil Mehta.
The committee was given a fortnight to submit its report on the feasibility of setting up an ARC/AMC for faster resolution of bad loans.
The recent Financial Stability Report of the Reserve Bank had said gross NPAs may rise to 12.2 per cent by March 2019 from 11.6 per cent in March 2018.
The bad loans in the system has become such a menace that the RBI has asked as many as 11 of public sector lenders like Central Bank, Bank of India, Uco Bank, Dena Bank, Allahabad Bank among others to not to engage in large lending activities under what it calls the prompt corrective action framework.
Before this drastic measure, last year the central bank had identified as many as 40 largest stressed accounts, including Bhushan Steel, Bhushan Power & Steel Essar Steel, Alok Industries, and Amtek Auto among others and asked banks to refer them for bankruptcy courts.
These 40 companies account for a whopping 40 per cent of the dud loan pile of over Rs 11 trillion in the system.
Following up its stern actions, on February 12 this year, the central bank scrapped all the extant debt resolution mechanisms such CDR, S4A, joint lenders forum among others and asked banks to classify any account that fails to service its debt obligation even for a day as NPA.
The idea of a bad bank has been in the works for sometime now but has more distracters than supporters as many feel that this will just create another badly performing entity as this would only embolden lazy and reckless banking. One of the vocla opponents of the idea is Raghuram Rajan, the former govenor of the central bank, while a notable voice favouring it is Arvind Subramanian, who announced his resignation from the post of chief economic advisor to the finance minister last week.