Mumbai: State Bank of India, ICICI Bank and some other large lenders came together on Wednesday to resurrect the idea of a ‘bad bank’ as an economic slowdown intensified by Covid-19 threatens to saddle lenders with more sticky loans.The proposed ‘bad bank’ would function like a large asset reconstruction company for the banking system, holding a chunk of non-performing assets (NPAs) and giving lenders a chance to improve their balance sheets and to focus on core banking activities. The concept, abandoned for more than a year, is now being revisited with the country’s largest lender SBI taking the lead.“SBI discussed the idea with other large banks, seeking their in-principle approval. Banks plan to approach the government for initial contribution of at least ₹10,000-15,000 crore for the proposed entity which would function like a system ARC. 75589722To Require Capital of Over Rs 50,000 Crore“If the government is unwilling, banks will have to explore other options, but that could make it more difficult. This is a matter where the government should really step in,” said a senior banker aware of the proposal.“It could be a typical structure where the banks transferring the loans share the upside if the recovery is good or the borrowing company turns around… we should have done this long ago,” said another banker.The ‘bad bank’ model has been tried in advanced markets including the UK, Japan and some European countries. Such a proposal was pursued by former RBI deputy governor Viral Acharya, but there was little progress as Acharya’s relations with New Delhi soured.Many in the banking circles think that with the Insolvency & Bankruptcy Code (IBC) slowly taking off, it’s an appropriate time to set up a bad bank, which would function as an independent entity run by professionals. It can focus on salvaging sunk loans through the traditional recovery process or can pursue them through IBC, which is believed to be an effective resolution mechanism. Such an entity focusing on distressed assets would do away with the timeconsuming process through which multiple banks arrive at an inter-creditor pact.A bad bank would require capital of well over Rs 50,000-60,000 crore if it has to take care of about Rs 10 lakh crore gross NPAs of the Indian banking system. However, helped by the IBC, NPAs reported by banks dipped in 2019 after rising for seven years.“It can’t be just another ARC. To make a bad bank meaningful, it should be positioned in a way, with the right kind of professionals, so that it does not come under the influence of big banks looking for a place to dump their toxic assets,” said an industry veteran.