Bad Banks
2020 DEC 19
Preliminary >
Economic Development > Indian Economy and Issues > Banking sector
Why in news?
- The government is exploring the option of setting up of a bad bank, to improve the health of the country's banking sector,
About Bad Banks:
- A bad bank or Asset Reconstruction company is a bank set up to buy the bad loans and other illiquid holdings of another financial institution.
- The entity holding significant nonperforming assets will sell these holdings to the bad bank at market price.
- By transferring such assets to the bad bank, the original institution may clear its balance sheet—although it will still be forced to take write-downs.
- The banking sector, led by the Indian Banks Association (IBA), had in May submitted a proposal for setting up a bad bank to the finance ministry and the RBI, proposing equity contribution from the government and the banks.
- A committee headed by former PNB Chairman Sunil Mehta had proposed an asset management company (AMC), ‘Sashakt India Asset Management’, for resolving large bad loans two years ago.
Issues:
- A government-funded bad bank would just shift loans “from one government pocket (the public sector banks) to another (the bad bank) eventually costing Taxpayer money.
- If the bad bank were to be in the private sector, the reluctance of public sector banks to sell loans to the bad bank at a significant haircut (reduction applied to the value of an asset when sold to an ARC) would still prevail.
- Also selling of assets to ARCs at a loss may, under the current norms, invite vigilance investigations in case of public sector banks.
- With the introduction on Insolvency and Bankruptcy code, the ability of banks to manage bad loans has significantly improved reducing the need for bad banks.
Prelims Question
Consider the following statements:
1.The cumulative amount of NPAs is more in public sector banks than private sector banks in India.
2.Insolvency and Bankruptcy Code, 2016 applied only to corporates and not individual debtors.
Which among the above statements is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2
Answer to prelims question
