Swiss Challenge auctions aren’t suitable for our impaired loans
Live MintThe problem of accumulation of non-performing assets on the balance sheets of banks doesn’t appear to be going away anytime soon, with current moratoriums only providing temporary respite.The deleterious effect on the operation of the banking sector, in particular the revival of credit, is only too well known. An optimal design of the market for NPAs can play an important role in minimizing public investment, triggering transactions, optimizing the transfer of risks out of the banking sector, and determining the “true value” of assets. First, the Indian NPA market is a forward auction, in which buyers bid for an object put up for sale by the seller, while the traditional Swiss auction is a reverse auction where sellers bid. Second, the bid should move from unidimensional bids on deal value to two-dimensional bids consisting of a proposed deal value, and a proposed cash proportion that is greater than or equal to the stipulated minimum. Finally, given that these measures would improve market conditions for ARCs, one could also incentivize a higher level of risk transfer by weakening the recourse provision available to them that allows them to return NPAs to banks at no cost.
Discover Related
)
)
)
)