IBA's Rs 75,000-crore bad bank idea takes shape, to be submitted to RBI, govt this week

“We are proposing three stages of resolution, including an Asset Reconstruction Company (ARC), Asset Management Company (AMC), and finally the Alternate Investment Fund (AIF). The ARC will be owned by the Government of India- that is what we planning, AMC will be a professional body with participation from public and private sector, and the AIF where we want to create a secondary market for Security Receipts,” said an official directly in the know of the proposal.

“We will freeze the exact capital requirement after discussion with the government but tentatively we are thinking about Rs 10,000 crore of capital and Rs 70,000-75,000 crore of bad loans (at book value),” the second person aware of the proposal added.

Bad loans across both public and private banks are proposed to be housed in this Bad Bank.

It appears after speaking to a cross section of bankers that the IBA intends for the bad bank to be scaled up eventually after starting with Rs 70,000 crore initially.

“We are thinking that maybe Rs 5-6 lakh crore of NPA with a book value of roughly a lakh crore - as banks have already made 70-80 percent provisioning against such accounts - has to be taken by the Bad Bank over a period of time,” explained the head of a large public sector bank.

This banker was not aware of the final amount decided by IBA, but added that if one assumes Rs 70,000 crore is transferred, then 15 percent of that would be required as capital if one works with the 15:85 ARC structure.

RBI had earlier introduced the 15:85 structure for loans sold to ARCs, under which the bank gets cash of 15 percent and security receipts of 85 percent, while the ARC holds SR (security receipts) worth 15 percent.