Amid growing concerns over a sharp rise in bad loans of public sector banks, the government is reportedly looking at setting up a bank or a company to deal with the issue.
"We have discussed it (setting up an asset reconstruction company), but you see the problem so far is that opinions are almost vertically divided on the issue," a senior government official told Press Trust of India.
With higher provisioning for bad loans weighing on their performance, many public sector lenders have posted combined losses of over Rs 12,000 crore for the December quarter. Top banks like State Bank of India (SBI) and Punjab National Bank (PNB) saw their profits plunge in the quarter.
"As a concept it (bad bank) is good. It has to be structured in such a way that it efficiently functions. It's not a bad idea given the current times," Punjab National Bank Managing Director Usha Ananthasubramanian said.
On the other hand, some bankers believe that having a separate institution to deal with bad loans of PSU banks may make the lenders negligent on the issue, as they would shift their non-performing assets (NPAs) to it.
Recently, Reserve Bank of India Governor Raghuram Rajan had said that there was "no need" to have a bad bank to deal with soaring NPAs of public sector banks.
"In my mind the banks are already trying work on their balance sheets... Public sector banks themselves have the backing of the government, so there is no need to create a new entity that has the backing of the government. The issue is now to clean it up," he said.
Global rating agency Standard & Poor's (S&P) said on Wednesday that PSU banks may face a rating downgrade in the coming months on account of difficulties in meeting capital requirements that arise out of higher provisioning for bad loans.
"In our view, Indian public sector banks may find it difficult to raise capital, given their currently weak operating performance, which makes it difficult for them to access the equity capital markets," said S&P credit analyst Deepali Seth.