Union Budget 2021: Centre will not support bad bank, lenders to create it on their own

The Centre will not infuse any equity in the asset reconstruction company (ARC)—bad bank—proposed in the Union Budget 2021-22, and it will be set up by private and public sector lenders.

“It will be in the private sector… It will help in faster resolution of cases, while freeing up banks to lend,” Economic affairs secretary Tarun Bajaj told TOI in a post-Budget interview.

After the presentation of the Budget on Monday (February 1), Finance Minister Nirmala Sitharaman said that bad loans have been one of the major problem faced by lenders and the government has repeatedly been providing capital infusion.

A bad bank acquires the toxic assets from lenders and pursues loan recovery on its own, while banks with cleaned-up books resume lending. Many analysts are of the view that the proposed bad bank move will ease some of the finance ministry's pressure by freeing up balance sheets to boost credit growth, which has grown by 6.7 per cent year-on-year basis.

The Union Budget for FY22 proposed to recapitalise public sector banks (PSBs) for Rs 20,000 crore and set up a bad bank to remove non-performing assets (NPAs), two decisions that are likely to boost credit flow.

Last month, the Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) predicted that banks’ gross non-performing assets (NPAs) may rise to 13.5 per cent by September 2021, from 7.5 per cent in September 2020 under the baseline scenario.

Further, Bajaj mentioned that the Centre had adopted a neutral approach with the National Infrastructure Investment Fund (NIIF) and allowed it to decide where it wants to park funds. While NIIF’s investment track record has been under the scanner, the economic secretary said it has pledged equity of Rs 21,000 crore and debt of Rs 8,600 crore.

He went on add that steps on the monetisation of assets will help create a robust pipeline for fundraising and investment and also tackle investor concerns over the absence of good assets in the market, especially when it comes to the government. “Several pension funds are scouting for longterm investments with stable returns over the next few years,” the daily quoted him as saying.