State-run banks working to build India’s first bad bank, want private entities to hold 51 percent stake in the AMC.
This includes asset managers and consultancies with the public sector owning a 49 percent stake.
However, those having any links to the bad assets housed in the AMC are not allowed to invest in it.
Public sector banks want to keep the entity a majority privately-owned structure, to ensure flexibility in decision-making.
Moreover, it intends to avoid the purview of the three Cs. This comprises of Central Bureau of Investigation, Comptroller and Auditor General of India and Central Vigilance Commission.
The entity aims to absorb stressed assets of lenders and set up as an asset reconstruction company.
A bad bank buys bad loans and illiquid holdings of other banks and financial institutions, which clears their balance sheet.
Indian Banks’ Association that led the banks had submitted a proposal last May to the Finance Ministry and the RBI.
The goal was to set up a bad bank proposing equity contribution from the government and the banks.
In fact, banks and non-bank financial companies need to identify risks early, monitor them closely and manage them effectively.
Moving forward, the risk management function in banks and NBFCs should evolve with changing times.
This is because technology becomes all pervasive and it should be in sync with best international practices.
Also, building buffers and raising capital by banks both in the public and private sector are crucial.
This will ensure credit flow as well as build resilience in the financial system.
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