Earlier this month, the Interim finance minister of India, Piyush Goyal, reported that his department was planning to set an asset reconstruction company that can also be termed as ‘bad bank.’ The primary aim of the company was to absorb the 9.5 trillion rupee debt in state-owned banks. The plan will see the banks remaining afloat by trying to reset their balance sheets. However, financial experts reported that the plan that was proposed by Goyal might not be concrete enough to solve the debt issue. With India’s weak judiciary, the ‘bad bank’ would not survive neither would it solve any problem in the system.
The Co-head of the Asian Bank research, Ismael Pili revealed that the ARC was a viable option. Ismael revealed that India still had a potential chance of running the idea and the outcomes would be similar to those of the Philippines. In the Philippines, the banks end up decaying for many years due to shortfall issues. The ARCs in India have had a very pathetic record. This is in disregard that they have been in the country for decades. This has left financial analysts with doubts of whether the idea of adding another one into the whole issue would further be a remedy for a better future. According to reports by Credit Sight, today’s India’s 24 ARCs can only get 3% of the bad assets into the system. This reduces their potency and makes them ineffective in the alleviation of the Indian debt.
‘Bad banks will not be able to be a solution in correcting all the issues in the system. Due to India’s weak Judiciary, companies have been kept swiftly from declaring insolvency, therefore allowing bad debts to fester for extended periods. Mr. Pili addressed the finance department saying that the nation does not have a reliable judicial system. He went on to point out the recovery rate that happened to be very low. It was just 26% from the ARCs. When the ARCs took the matter into its hands to correct the issue, it was averagely 4.3 years. What India needs is increased capital. At the start of the year, the Prime minister proposed a $14 billion capital to be injected to rescue all public banks. However, experts said that this was not enough. They went on to say that maybe $20 billion or $ 50billion injection would have seen the banks revived. With$14 billion the banks wouldn’t be able to meet the essential regulatory requirements.