Concept of a Bad Bank

-
Concept of a Bad Bank

The lockdown imposed during the pandemic period, banks are likely to witness an increase in Non-performing assets (NPAs). Before the lockdown, the gross NPAs were below Rs 10 lakh crore, which is now expected to cross Rs 11 lakh crore by the end of this fiscal year.

What are NPAs?

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPAs are further classified as Substandard, Doubtful and Loss assets. Banks use write-offs to remove bad loans from their balance-sheets and minimise their tax liability.

The Finance Minister Mrs Nirmala Sitharaman made a proposal for the ‘bad banks’ in her Budget speech for 2021 for the overall welfare of banks.

It is advocated that ‘Bank Bank should bt incorporated in private sector for because asset restructuring requires quick decision-making, which may not happen in Public Sector Banks.

What is a Bad Bank?

A ‘bad bank’ simply put is a bank that purchases the bad loans of other lenders and financial institutions at market price. Next, the bad bank resolves these bad assets over a period of time. The banks in the process though would be forced to go for write-downs and will be free from the fetters of NPA and can draw a fresh approach toward fresh lending.

A bad bank is technically an asset reconstruction company that buys bad loans(NPAs) from the commercial banks at a discount and tries to recover the money from the defaulter by providing a systematic solution over a period of time.

International Precedent

 The 2007-2010 financial crises led to the creation of bad banks in many countries. In the US, as part of the Emergency Economic Stabilisation Act of 2008, a bad bank was suggested to address the subprime mortgage crisis (real estate loans default). In Ireland, the National Asset Management Agency was established in 2009 to respond to the financial crisis.

Issues concerning success of a Bad Bank

  1. Finding buyers for bad assets in a pandemic hit economy will be a challenge, especially when governments are facing the issue of containing the fiscal deficit.
  2. Public sector banks have accounted for 86%, of the total NPAs. If appropriate structural reforms in banking sector are not made, they may go on doing business the way they have been doing in the past and may end up piling-up of bad debts again.

  3. The Government, in the last few years, has infused nearly Rs 2.6 lakh crore in banks through recapitalisation. Those who oppose the concept of bad banks hold that the government has on its part recapitalised the banks to compensate for the write-offs and hence, there is no need for a bad bank.
  4. The price at which bad assets are transferred from commercial banks to the bad bank will not be market-determined and effect pricing.
  5. A bad bank may create a moral hazard and enable banks to continue reckless lending practices, without any commitment to reduce NPAs.

Comments

Post a Comment

Popular posts from this blog

UK and India vow 'quantum lead' in Modi-Johnson meet

-
Image
Background India – UK Relations India and Britain have had umbilical relationship since our independence; yet, building a sustainable partnership with Britain has been rather hard. While India’s relations with countries as different as the US and France have dramatically improved in recent years, ties with Britain have lagged. One reason for this failure has been the colonial prism that has distorted mutual perceptions. London has found it difficult to shed its own prejudices about India. The bitter legacies of the Partition and Britain’s perceived tilt to Pakistan, coupled with Britain’s domestic politics have long complicated the engagement between Delhi and London. Delhi’s problems have been accentuated by the British Labour Party’s growing political negativity towards India. At a virtual summit between Prime Minister Narendra Modi and his UK counterpart Boris Johnson India and the UK launched an  Enhanced Trade Partnership  that envisages facilitating market ac...
Read more

Violence in Jerusalem and threat of escalation

-
Religious and historical significance of Al – Aqsa Mosque Jerusalem is historically important for Jews, Christians and the Muslims alike. Al-Aqsa mosque is an important holy site in Islam, located in the Old City of Jerusalem. After Mecca and Medina, Al-Aqsa is the most sacred site for Muslims. It was built about four centuries ago, Al-Aqsa translates from Arabic to English as ‘the Farthest Mosque’. According to the Quran, it is believed that Prophet Muhammad travelled from Mecca to Al-Aqsa during the Night Journey, and then on to heaven. Temple Mount, located in the compound, is a walled-in area dating back to the time of the Second Jewish Temple, built at the end of first century B.C.E. Jews believe that these walls were built around the summit of Mount Moriah where Abraham offered his son Isaac as a sacrifice. Originally built as a small prayer house, the mosque was reconstructed by the Umayyad caliph Abd al-Malik in 705 CE. After an earthquake, it was rebuilt again in 746, then in ...
Read more

BEN GURION CANAL- ISRAELI ANSWER TO SUEZ

-
Image
                    Introduction      Its common knowledge that the International trading community suffered colossal losses, by the blockade happened in Suez Canal for a week. The blockade exposed the vulnerability of the present trade sea routes when Suez canal goes in-operational since it acts as an impasse between two seas.      Hence when Israel announced the start of work on the "Ben Gurion Canal", the futuristic alternative canal to the Suez Canal, it was a breaking news to the world. Naturally conspiracy theories are also agog. Many Islamic groups and leaders pointed out that the whole episode was a deep rooted conspiracy to undermine the supremacy of the Islamic world and Egypt over the world trade routes. They believe that the blockade was conjured by Israel to berate the Suez Canal management. Ben Gurion Canal Project    After Egyptian President Abdel Fattah Al-Sisi signed the ...
Read more