Plugging the long-standing gap between policy intent and action, the government has displayed a firm resolve to expedite the recovery process of the banking sector
The banking sector in India has played a pivotal role in the growth and development of the economy. By mobilising deposits and facilitating seamless credit flows, the banking sector is also a crucial lifeline for many small and big businesses.
However, the financial health of several Indian banks has come under severe stress over the years as they are dealing with the exponentially growing NPA crisis. This has impacted the profitability and credibility of the banking sector in India and heightened the risk of capital erosion.
In order to restore the health of banks back to normal, Finance Minister Nirmala Sitharaman had proposed the setting up of a national bad bank in Budget 2021. The idea has come to fruition with the setting up of the National Asset Reconstruction Company Ltd (NARCL) after the central government approved Rs 30,600 crore guarantee. This is an important policy support measure which has the potential to emerge as a game-changer for the resolution of bad loans in the country.
By acting as an aggregator of bad loans by purchasing them at a discounted price from banks, the NARCL will accelerate the pace of bad debt resolution, and expedite the asset recovery process in the economy. The transfer of stressed assets to the NARCL will significantly improve the balance sheet quality of banks, and restore investor confidence in India’s banking system.
Plugging the longstanding gap between policy intent and action, the government has displayed a firm resolve to expedite the recovery process of the banking sector. The NARCL initiative will also go a long way in creating a healthy competitive environment for other ARCs and distressed funds leading to better price realisation and value addition.
PSU banks will be in a much better position to revamp their liquidity positions and ensure improved credit access and availability for businesses. By facilitating better credit delivery mechanisms, the bad bank initiative rolled out by the government holds the key to positioning India as a $ 5 trillion economy.
Nirmal Gangwal, Managing Partner, Brescon & Allied Partners LLP.
Views are personal and do not represent the stand of this publication.
