India must consider creating banks to address the “adverse impact” of bad loans public sector banks have accumulated during the coronavirus pandemic, the Confederation of Indian Industry (CII) has told the government.
The business association, in its pre-budget suggestions to the finance ministry, said market-determined price discovery mechanism for resolving stressed assets is important in the pandemic.
“With huge liquidity both globally and domestically multiple bad banks can address this issue in a transparent manner and get the credit cycle back in action,” said CII president Uday Kotak.
Bad loans, or non-performing assets (NPA) in industry parlance, are sold to asset reconstruction companies, but as ARCs have limited capital and therefore sale of soured loans is done through Security Receipts. Issuance of security receipts results in banks receiving payment only on recovery.
The low recovery rates and the sale through security receipts is unattractive for banks. A robust market-based mechanism will encourage public sector banks to sell their bad loans without fear of scrutiny, said CII.
CII also urged the government to consider allowing Foreign Portfolio Investors and Alternative Investment Funds to purchase NPA.
Alternative investment funds regulated by the Securities and Exchange Board of India should be allowed to buy bad loans in line with a consultative paper by the Reserve Bank of India. SEBI can frame regulations to protect the interest of all stakeholders, it said.
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