The Bad Bank Theory

THE GOVERNMENT HAS GIVEN SIGNAL TO BANKS TO TRY OUT YET ANOTHER RESOLUTION APPROACH, INCLUDING AMC-AIF, FOR DEALING WITH GROWING STRESSED ASSETS. WILL IT WORK?

- Anand Adhikari

THE OFT-REPEATED CATCHWORD ‘desperate times call for desperate measures’ has origins in an old saying: ‘For extreme diseases, extreme methods of cure are most suitable.’ Pinstriped bankers around the world couldn’t agree more. The world has often resorted to extreme methods when faced with a mountain of bad debt. In the last decade, China created four asset management companies (AMCs) (or Bad Banks in banking slang) to house stressed loans. Even after a decade and a half, these four AMCs are happily writing more business. Almost four dozen region-specific AMCs have come up in the last five years, buying bad loans from local Chinese banks. In the late 90s, the Indonesian government was more clinical. It transferred all the bad loans at zero value to a restructuring agency. This was immediately followed by merging the four state owned weak banks into one big entity. The story in other countries is no different. India, too, has debated a plenitude of options including a bad bank, merger of weak banks, AMCs, etc. With the unveiling of the Insolvency and Bankruptcy Code (IBC) two years ago, the debate appeared to have been settled but clearly the last word has not been said on the issue.

In July, a committee led by Sunil Mehta, Chairman of Punjab National Bank, has come out with a new approach of slicing and dicing stressed loans based on size. This also includes an AMC and an AIF ( Alternate Investment Funds) to deal with large size loans. In other words. sn AMC or a Bad Bank would take over the stressed assets of banks first, with funding from the AIF. Interim finance minister Piyush Goyal, instantly gave a go ahead to this new approach (See