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Bad bank is a good idea, says Uday Kotak

Mumbai: Kotak Mahindra Bank chief Uday Kotak today called for a national bad bank, saying the present state of the financial sector needs such an institution so that they can continue to oil a fast-growing economy.

“The stress in our banking sector must be eradicated to allow the system to lend to small businesses and other growing sectors of economy. And the present health of our public sector banks do not allow them to do so.

“Therefore, a national bad bank is a good idea,” Kotak said delivering the Pravinchandra Gandhi lecture at the Mumbai University organised by the industry body IMC.

Describing the 24 PSU banks as “the 70 per cent problem” (in reference to the over 70% market share of these banks), he wondered what was the need for so many state-run lenders, which is the highest in the world after China.

“I am all for public sector banks. Their service to the nation is humongous. Without them small and medium sector would have been in difficulty. The entire PSL sector lending would not have been possible till some years ago without them. But my point is do we need all of them as many as 24 of them?” he said.

Kotak said since the issue of PSL (priority sector lending) is no longer a burden to any one, as private sector lenders are only happy to buy such credit from the PSU banks, it is time to move on and merge them.

“The management and governance teams to run 24 state- run banks need huge investments and faces challenges…merger among the public sector banks will help in resolving this problem,” he said and rued that successive Governments since the 1969 nationalisation have done little on this front.

However, he said just by creating a bad bank will not solve the issue of bad loan which he pegged at around 20 per cent of the system. It should be ensured there is a solid basis to price the stressed assets at a fair value and a strong management is in place to run it.

“We need to have a very solid basis of transferring assets at fair price to the bad bank and then having a strong recovery team which can manage this well by being surgical, logical and ruthless,” Kotak said.

It can be noted that after the Economic Survey, which called for setting up such a bank, the industry was expecting an announcement in this regard in the Budget to tide over the mounting NPA problem in the banking sector.

While banks need close to Rs 1 trillion in fresh capital by fiscal 2019, the Government had budgeted only Rs 10,000 crore in the next financial year, while it gave Rs 25,000 crore each in fiscal years 2016 and 2015.