The editorial, "The bad bank debate" (October 6), is a balanced one. While it touches upon the pluses and minuses of the proposal, it finally leaves the decision to the Reserve Bank of India. Simultaneously, Ishan Bakshi's report, "Split verdict on bad bank" (October 6) lucidly discusses the pros and cons of setting up a bad bank. But I am afraid neither has looked at the issue from the bankers' perspective and the present situation.
First, why the need for a bad bank at all? Presumably to save public sector banks (PSB)? Has anybody thought what benefit would accrue from transferring the cancer in one leg to the other, considering that PSBs and the proposed bad bank are both in the public sector? How should the dues from defaulters be recovered by the lending bank itself - through new steps or existing provisions?
If the bad bank is set up, PSB officials would not bother to follow up on a loan as they would know that eventually it would be transferred to the bad bank for recovery. This is a dangerous situation.
Another point is that the proposed bad bank would be "buying" bad loans from banks at a discount. This means the lending bank would incur a loss in the process. Is this the aim while lending money to a borrower?
If the bad bank is able to resolve bad debt, why can't the bank lending in the first place do the same thing? Nowadays, each PSB has a separate department for managing stressed assets. Whatever the bad bank proposes to do can be handled by these departments. The argument that a bad bank should be set up because senior executives of PSBs are saddled with managing stressed assets and hence don't get enough time to look at fresh opportunities for lending, is doubtful.
Without a disincentive for loans becoming bad and the onus of their recovery/resolution on the lending bank, the latter may become more reckless in assessing requirement of funds by a new borrower. In most cases of bad debt, timely follow-up and some concessions would enable promoters to make repayments. In the case of selling the bad debt to the bad bank, the loss would be higher than the concessions offered to the promoters for repayment.
B C Unnikrishnan Nair, Kuthiathode
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