The banking sector has been flooded with NPAs during the past decade. As a result, most of the banks have become financially unstable, facing unexpected losses continuously. This has also weakened the people’s trust in banks, imbibing a fear of losing their life savings and demands for higher cover under the Deposit Insurance scheme. Recently, RBI imposed a moratorium on some co-operative banks and a large private sector bank is an example of this.
The present GNPA ratio of 7.5% is expected to rise to a shocking percentage of 15.5-14% by end of 2021. The failure of the judicial system to help in the recovery of debts, several measures were taken ranging from the establishment of DRTs in 1993 to Insolvency and Bankruptcy Code in 2016. Additionally, SARFAESI Act was enacted in 2002 to enable banks to take possession and dispose of the assets to realise their dues. But ultimately all of these weren’t sufficient to address the issue.
Another idea developed now for improving the balance sheets of banks is setting up the bad bank. The bad bank is like another Asset Reconstruction or Management Company. Hardly a few ARCs in the private sector could scratch the surface of NPAs. The bad bank is to be sponsored by the banks themselves and would get the largest value NPAs from the banks on their books. The bad bank though remains in the banking system they are expected to focus on recoveries and not retail banking business.
Canara Bank with a stake of almost 12 per cent in the proposed bad bank is the lead bank with other main players like SBI, HDFC, PNB, ICICI and BOB also picking up shares. The setup seems to be more like an illusion to clear the balance sheets of banks. The failure of the bank invited new institutions to succeed. The focus in a bank on recoveries was poor. The only focus of the proposed bank is recoveries and it is expected to show better performances.