The Narendra Modi government's coming budget is expected to reboot its plans for disinvestments in key state-owned enterprises, which were disrupted by the COVID-19 pandemic.
Reuters reported on Thursday that the budget, to be presented on February 1, could see announcement of a sale of "10% to 15%" stake in Life Insurance Corporation of India, the largest insurer in the country. LIC has assets under management of over $400 billion. “To facilitate the sale of government stake in the LIC, the government will get a Parliament approval to amend the LIC Act,” Reuters quoted a source as saying.
Reuters reported that the "government also plans sales in stakes in IDBI Bank, Central Bank of India and Punjab & Sind Bank". "Together, the plan is to raise 2.5 trillion to 3 trillion rupees ($34 billion to $41 billion) in the next financial year, officials said, partly to set off the shortfall in the proceeds this year," Reuters reported.
Bad bank
Reuters reported the government could announce creation of an institution that has been discussed for years: A bad bank. A bad bank buys and restructures non-performing assets.
"Aiming to boost lending in the economy and improve the valuation of state-run banks before selling stakes in them, the government could announce creation of a bad bank, where toxic assets of banks worth billions of dollars would be transferred," Reuters quoted a source as saying.
Reuters quoted an official as saying "The objective is to park bad assets of state-run banks into the proposed bad bank and later sell those assets at a discounted price in the market.” This would help clean up balance sheets of banks.
The concept of a bad bank has been discussed multiple times since 2015 as the problem of non-performing assets started growing. However, the proposals had made little headway given issues such as inadequate capital and lack of buyers. In 2015, then RBI governor Raghuram Rajan opposed a proposal by bankers for a ‘bad bank’, arguing that private asset reconstruction companies should move to buy bad loans.
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In May 2020, a lobby of banks asked the government to set up a 'bad bank' at an initial cost of $2 billion. "The banks… proposed that the government set up an asset reconstruction company (ARC) to initially buy non-performing loans worth up to a total of 1 trillion rupees ($13.3 billion)," Reuters had then reported.
RBI Governor Shaktikanta Das had indicated earlier this month the central bank could consider a proposal to set up a bad bank. The RBI had warned NPAs in the banking sector could shoot up to 13.5 per cent of advances by September 2021, from 7.5 per cent in September 2020.