India formally set up a bad bank as part of the nation’s ongoing efforts to remove one of the world’s largest piles of soured debt from the balance sheet of financiers and accelerate lending.
The firm was registered as the National Asset Reconstruction Company Ltd. on July 7 with Padmakumar Madhavan Nair as the managing director, according to filings with the Registrar of Companies, where firms must register before becoming operational.
NARCL’s paid-up capital is Rs 74.6 crore ($10 million), according to the filing. Nair previously worked at the State Bank of India where he handled stressed assets resolution.
Sunil Mehta, chief executive officer of the Indian Banks’ Association, will be a director, while SBI’s Salee Sukumaran Nair and Canara Bank’s Ajit Krishnan Nair are nominee directors on the board, according to the filing.
The bad bank will provide a much-needed relief to Indian lenders struggling to bring down their massive bad loan pile that has eroded profit and constrained their ability to lend. It’s intended as a fillip to Prime Minister Narendra Modi’s attempts to boost credit flow to pump up the South Asian economy that has shrunk the most in nearly seven decades as a fallout of the pandemic.
The government’s decision to start the bad bank comes after an overhauled bankruptcy process rolled out in 2016 saw only muted success.
The bad bank will be owned by government-run and private sector lenders and will allow financiers to transfer as much as 2 trillion rupees of soured loans and effectively free them from years of carrying and providing for these loss-making assets. The announcement of such an entity was first made by India’s Finance Minister Nirmala Sitharaman in her budget speech in February.
Investors will be watching whether the bad bank manages to actually resolve the assets rather than keeping them like a warehouse, and whether its team includes appropriate industry and turnaround experts.