Bad bank is good, but PSUs need more capital: Fitch

Banks need Rs 6 L cr to restore health

Bad bank is good, but PSUs need more capital: Fitch
International rating agency Fitch has endorsed the idea of ‘bad bank’ discussed in detail by Chief Economic Adviser Arvind Subramanian in this year’s Economic Survey but said enhanced capital was needed to restore PSU banks’ financial health.

Fitch said public sector lenders will need around $90 billion or over Rs 6 lakh crore in new capital in 2018-19 to restore their financial health and meet Basel III norms.

The government under the Indradhanush scheme for PSU lenders has provided for Rs 70,000 crore of capital until 2018-19 but the Fitch believes it would not be enough.

“The creation of a bad bank could accelerate the resolution of stressed assets in country’s banking sector, but it may face significant logistical difficulties and would simultaneously require a credible bank recapitalisation programme..,” Fitch Ratings said in a report on Friday.

The Economic Survey this year has proposed creation of Public Sector Rehabilitation Agency that could purchase loans mostly belonging to overstressed infrastructure and steel companies from banks. The rehabilitation agency will then convert debt into equity or sell stakes or go for debt reduction.

“Once the loans are off the books of the public sector banks, the government would recapitalise them, thereby restoring them to financial health and allowing them to shift their resources – financial and human – back toward the critical task of making new loans,” the survey had said.

Fitch too said that similar mechanism has been used to help clean up banking systems in the US, Sweden, and countries affected by Asian financial crisis in the late 90s. Senior European policymakers have recently discussed prospect of a bad bank to deal with NPLs in the EU. But, however, suggested that the debt of a single entity be transferred to one bad bank. This Fitch said because large corporates often have debt spread across a number of banks, making resolution difficult to coordinate.

“This could be particularly important in the country’s current situation, with just 50 corporates accounting for around 30% of banks’ stressed assets,” Fitch said.

India, ADB ink $375 m loan pact

India and the Asian Development Bank (ADB) have signed a $375-million pact for loans and grants to develop 800-km Visakhapatnam-Chennai Industrial Corridor, which is the first phase of a planned 2,500-km East Coast Economic Corridor.

ADB had last September approved $631 million in loans and grants for the industrial corridor.
ADB said in a statement that it approved loans comprising a $500 million multitranche facility to build key infrastructure in the four main centers along the corridor — Visakhapatnam, Kakinada, Amaravati, and Yerpedu-Srikalahasti in Andhra Pradesh.
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