Rajan doubts efficacy of 'bad bank' concept

Raising a question mark over efficacy of any 'bad bank' to handle stressed assets in India, RBI Governor Raghuram Rajan today said such a concept generally works when stressed assets are largely with private lenders and not when capitalisation is to be done by the government.
According to reports, the Prime Minister's Office is mulling a proposal to set up a 'bad bank' in form of a new Asset Reconstruction Company (ARC) with equity contribution by the RBI and central government.
"I think this is an unsubstantiated report in the papers...Until there is a statement, I don't want to react," Rajan told representatives of wire agencies in an interaction.

He, however, further said that such a 'bad bank' works well in a scenario, where private sector lenders have accumulated large chunks of stressed assets.
In contrast, the bulk of stressed assets lie with public sector banks in India and the government has shown commitment to recapitalise them.
"There really is no need for a bad bank because the capitalisation is going to be in the hands (of the government)," he said.

Flagging the issue of pricing, Rajan said such a body with state-run characteristics can face trouble if it pays too high for an asset, while if it pays too low, the state-run banks will face flak for selling cheap.

"It is not clear to me that a quasi-public entity will solve that problem effectively," he said.
Liquidating an asset may not be an option every time and the bad bank has to work on reviving it, he said, questioning if such an entity will be able to do the job.
"Unless the bad bank is going to do a job of either pricing, or recovery or it is done in a transparent way that public does not start getting angry, unless we can have structures in place to assure us of that, it is not clear if it solves any problem that we have," he said.

"The idea of a bad bank continues to be proposed...As I have said in the past, we need to have a very good sense of who owns it and who manages it," he said.
As of now, there are 15 ARCs in the system, but their performance in weeding out the stressed assets has often been questioned.
Many of the ARCs are floated with equity participation by banks and the government has allowed a slew of relaxations for the sector in the recent past, including upping the foreign ownership.