RBI deputy guv Viral seeks 2 asset management companies to tackle bad debt

According to Acharya's plans, govt should not bear full cost of restructuring losses

Reserve Bank of India’s (RBI) Deputy Governor Viral V Acharya, in his maiden speech as a central banker on Tuesday, proposed the creation of two asset management companies, one private and another a quasi-government, to solve the banking system’s bad debt problems for good.

The vision and intent to fight a large issue in Indian banks remind one of the debut press conferences of former RBI Governor Raghuram Rajan when he had announced plans to resolve issues in banks and the financial sector. Incidentally, Rajan is one of the references in Viral Acharya’s résumé. “I have been thinking hard of ways to swiftly resolve bank stressed assets,” Acharya said. He was speaking at the Indian Banks’ Association’s banking technology awards summit. “… there has to be an incentive provided to banks to get on with it and restructure the stressed assets at a price that clears the market for these assets.”

According to Acharya’s plans, the government should not bear the full cost of restructuring losses just because it is the majority owner of public sector banks. 

“It should manage the process at the outset to avoid that outcome. Wherever possible, private shareholders of banks should also be asked to chip in.” The deputy governor proposed the creation of two agencies — Private Asset Management Company (PAMC) and the National Asset Management Company (NAMC). The PAMC would be suitable for sectors in which the stressed assets have an economic value in the short run — for example, sectors as metals, engineering and procurement, telecom and textiles. For each asset, there should be turnaround specialists and private investors who would propose restructuring plans, laying out “sustainable debt and debt-for-equity conversions for banks to facilitate the issuance of new equity and possibly some new debt to fund the investment needs”.

The NAMC, on the other hand, would be for sectors in which the problem is “not just one of excess capacity but possibly also of economically unviable assets in the short to medium term” — for example, the power sector, in which projects have been created to deliver capacities beyond immediate needs. 

For this kind of assets, which require a long time to generate cash flows, the government should have incentives to clear approvals and purchase agreements to make them viable. 

The deputy governor also suggested some options for banks to solve their capitalisation problems. Acharya suggested private capital might be raised by issuing deep discount rights. The banks should also sell their good assets to generate cash. Besides, there should be a merger of banks as it is not clear “why we need so many public sector banks. The system will be better off if they are consolidated into fewer but healthier banks”.

He also suggested tough and prompt corrective action for under-capitalised banks.