Mumbai: The creation of a ‘bad bank’ and the efforts of privately run small asset reconstruction companies (ARCs) to help resolve the stressed assets in the banking sector have run into roadblocks.
Whilst the ‘bad bank” will help to unburden some of the bad assets, banks would still simultaneously require a credible bank recapitalisation programme to address the capital shortfalls at state-owned banks said rating agency Fitch.
The small ARCs, on the other hand, have met with resistance from banks as they were reluctant to take a haircut on their bad loans, fearing queries from vigilance organisations.
Fitch estimates that the banking sector will require around $90billion in new total capital by FY19 to meet Basel III standards and ongoing business needs.
“Asset-quality indicators may be close to their weakest levels, but the pace of recovery is likely to be held back by slow resolution of bad loans,” the agency said.
50 corporates account for around 30 per cent of banks’ stressed assets.
Several small private ARCs already operate in India but they have bought up only a very small proportion of bad loans in the last two years, as banks have been reluctant to offer haircuts on bad loans even where they are clearly worth much less than their book value.