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Bad bank´ to speed up resolution of stressed loans: Fitch

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The creation ofa ´bad bank´ will speed up resolution of stressed assets in the banking system, but it will also require significant capital infusion in the staterun banks to meet any shortfall, saysareport.
The recent economic survey mentioned about formation ofabad bank that will purchase stressed assets and take them to resolution.

“The creation ofa ´bad bank´ could accelerate the resolution of stressed assets in country´s banking sector, but it may face significant logistical difficulties and would simultaneously requireacredible bank recapitalisation programme to address the capital shortfalls at stateowned banks,” Fitch Ratings said inareport here on Friday.

It said the country´s banks have significant asset quality problems that are putting pressure on profitability and capital, as well as constraining their ability to lend.

It expects the stressedasset ratio to rise over the coming year from the 12.3 per cent as at endSeptember 2016, with the ratio significantly higher among stateowned banks.

The rating agency said the banking sector will require around $90 billion in new total capital by financial year 201819 to meet Basel III standard and ongoing business needs.

This estimate is unlikely to be significantly reduced by the adoption ofabadbank approach, and could even rise if banks are forced to crystallise more losses from stressed assets than currently expected, it said. “We believe the government will eventually be required to provide more than the $10.4 billion that it has earmarked for capital injections by the financial year 201819 —be it directly to stateowned banks or indirectly throughabad bank,” it said.

It said bad bank´s most likely form would be that ofacentralised assetrestructuring company (ARC).

Bad bank´s proponents believe it could take charge of the largest, most complex cases, make politically tough decisions to reduce debt, and allow banks to refocus on their normal lending activities, it said.
Business Standard New Delhi,25th February 207

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