Indian bankers on Wednesday poured scepticism on a proposal by the RBI to set up new private or state companies to buy up bad debt from lenders, warning that the plan would add more complexity and delay restructuring.
Economists say it has become imperative to tackle record stressed loans of $133 billion held by Indian banks by last September, or about 12.34 per cent of their total loans, as the burden constrains lending and delays private investment.
The Reserve Bank of India Deputy Governor Viral Acharya, in a major speech to bankers on Tuesday, proposed the creation of a private-based agency or a government asset management entity to buy and restructure the soured loans.
But in a sign of the difficulties the RBI would face, bankers expressed opposition to the proposal, saying it would take too long to agree on how the scheme would work and then risk further delays as the institutions are set up.
Instead, bankers urged the RBI to stick to an existing framework and make improvements, if required.
New rules under the former RBI governor Raghuram Rajan forced banks to first recognise the true extent of bad loans and then provided flexibility to restructure them, including by measures such as selling them off to private companies.
"Creating an institution itself is not an easy task," said a senior banker at a state-run lender, who declined to be identified commenting on the RBI. "The better way would be to use the existing infrastructure."
Critics of the existing RBI framework for restructuring bad loans have warned it leaves banks with too much discretion in solving the problems - a view echoed by Acharya, who called for a new approach of "tough love" for lenders.
But the creation of a so-called "bad bank" also has its own critics, including Rajan, who felt such an approach would simply shift the soured debt from banks to another firm, and said the focus needed to be on how to restructure the bad loans.
Banks continue to see sour loans growing, although the pace has slowed. Resolution, however, remains slow, including sales of bad loans to so-called asset reconstruction companies.
Up to government
Ultimately, much will depend on the government's stance.
The Finance Ministry appears open to Acharya's approach, having already proposed in January setting up a bad bank to buy soured loans from lenders and then restructure them, including such measures as converting debt to equity.
On Wednesday, Arvind Subramanian, chief economic adviser to the finance ministry, reiterated that the government was looking at the creation of a bad bank, adding that it was in touch with the RBI.
But even if the government and the RBI agree on creating an institution to tackle bad debt, the differences in structures under the existing plans would need to be ironed out.
Acharya was careful to avoid saying his proposal would create a bad bank, saying he wanted institutions with a narrow mandate to deal with soured loans, while warning that an unduly broad mandate risked creating "mission creep".
Instead, he said his speech marked the start of fresh discussions on a topic that has cast a shadow over the economy.
"There are many details to work out. But I hope this provides a start," Acharya said.