February 8, 2017 / 2:26 PM / in 8 months

RBI deputy says 'bad bank' could help if designed right

Currency of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012. REUTERS/Vivek Prakash/Files

MUMBAI (Reuters) - The Reserve Bank of India (RBI)deputy governor on Wednesday joined the debate over creating a so-called “bad bank” to handle record sour assets in the nation’s banks, saying it could help if “designed properly”.

Banks in India had record stressed loans of $133 billion, or 12.34 percent of their total loans, as of last September.

About two dozen state-owned lenders, which own nearly 70 percent of India’s banking assets, have an even higher stressed-loan ratio of 15.88 percent, according to data compiled by India’s central bank.

In its economic survey released on Jan. 31, the finance ministry suggested setting up a bad bank that it said could be used to buy bad loans from the banks and deal with them through methods including conversion of debt to equity.

While the idea is not new, critics including former Reserve Bank of India Governor Raghuram Rajan have questioned the need for it at a time when more than a dozen already existing companies buying bad loans have yet to make a significant dent.

“I don’t think a bad bank just by itself will necessarily work, I think it has to be designed right,” Viral Acharya, one of the four deputy governors in the RBI, said on Wednesday.

“The big piece of the problem is can you get the bank to sell the assets at the right price to (asset reconstruction companies) and private investors who want to come in ... I think that’s going to be key,” Acharya, a former New York University economics professor who joined the RBI last month, told a news conference after the central bank held rates.

“We’re going to be thinking about what kind of design issues might help with that. But we think it is something designed properly could help.”

One of the reasons cited for lower than expected bad loan purchases by asset reconstruction companies is the high price expectations by the banks, analysts say.

A slow legal process - India just last year enacted a bankruptcy law - is another factor that has been blamed for hindering the resolution of the bad loans.

Including “unrecognised” problem debts, total stressed loans in the system could be as high as $191 billion, or 16.6 percent of the total loans as of September, the finance ministry has estimated. For the state-run banks, nearly 20 percent of the loans are stressed, it said in the economic survey.

($1 = 67.2800 Indian rupees)

Reporting by Devidutta Tripathy; Editing by Tom Heneghan

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