Arun Jaitley
Finance Minister Arun Jaitley (L) gestures as India's Junior Finance Minister Jayant Sinha watches during a news conference in New Delhi, India, August 14, 2015. [ File photo]REUTERS/Adnan Abidi

The NDA government has dissolved the idea of a "Bad Bank" and is reportedly creating an asset reconstruction company (ARC) that will take over the Public sector banks' (PSBs) toxic loans. The government decided against the initial plan of creating a bad bank as it's not keen on infusing more taxpayers' money towards resolution of loss-making banks.

A top government official informed The Economic Times that the resolution process under Insolvency and Bankruptcy Code (IBC) has enough power and expertise to tackle bigger bad loans. He added that creating another "bad bank" would not be a value-driven step.

The idea of a bad bank re-emerged after state-run banks suggested the creation of an ARC to tackle the bad loans. The PSBs even wanted to rope in the National Infrastructure Investment Fund (NIIF) toward this end.

The bad bank is a government-funded vehicle that manages bad loans of all the PSBs, but the ministry has been showing reluctance to back the idea.

The idea is that such a move would allow the lenders to start on a clean slate, thus boosting credit growth amid an economic revival.

The Economic Survey for 2016-17 had recommended a Public Sector Asset Rehabilitation Agency (PARA), highlighting the fact that the private sector ARCs had not been successful in resolving bad debts.

Meanwhile credit rating agency on June 7 published a report where it highlighted that due to low paced recoveries and upgrades, gross nonperforming assets (NPAs) spiked to Rs 10.2 lakh crore (11.8% of total loans) on March 31 from Rs 7.65 lakh crore (9.5% of total loans) in the year earlier.

The report also said the government's plan of recapitalisation will still broadly resolve the regulatory capital needs of the country's 21 public sector banks (PSBs) and help augment their loan-loss buffers but will be insufficient to support credit growth.

Weak financials due to mounting provisioning and bad loans have already forced 11 state-run banks out of 21 into the Reserve Bank of India's Prompt Corrective Action (PCA) framework, which restricts their business activities until their financials improve.