Public sector bank stocks were buzzing with activity last week. The Centre exploring the possibility of setting up a stressed asset fund to invest in distressed assets of banks came as a relief to the ailing PSBs that are saddled with bad loans. While the details of the proposed stressed fund are not yet known, reports that SBI would be spearheading it saw the stock gain 5 per cent.
Other PSB stocks gained too. SBI’s bad loans rose to 6.5 per cent of its total loans to about ₹98,000 crore as of March 2016. Hiving off its stressed loans into a separate company can help India’s largest lender reduce its massive bad loan book.
But given that the 15 asset reconstruction companies (ARCs) formed for just this purpose are yet to demonstrate their ability to recover amounts from bad loans, it needs to be seen if a government-sponsored ‘bad bank’ can do the trick.