The idea of bad bank was initially mooted in January 2017 when Economic Survey of India carried an idea of setting up a Public Sector Asset Rehabilitation Agency (PSARA). The RBI, too, had come up with suggestion of setting up two entities to clean up bad loans mess of ailing Public Sector Banks (PSBs) - Private Asset Management Company (PAMC) and National Asset Management Company (NAMC). The idea of forming an asset reconstruction company (ARC), for taking over non-performing assets (NPAs) of the PSBs, raised in January 2017 did not find favor from Government also, as it wasn't keen on diverting taxpayers' fund for resolution of NPAs.
What is a Bad Bank?
Bad banks are generally set up in the times of crisis when long-standing banks are attempting to revive themselves or their reputation. A bad bank is none other than an asset reconstruction company that is floated to buy toxic loans and illiquid assets of other ailing banks at market/negotiated price. The banks' holding significant portion of non-performing assets will sell their holdings to the bad bank. Further, it won't make sense to buy small value non-performing assets as it may not fetch much value to the bad bank, in comparison to limited manpower and efforts required for recovery. The bank selling toxic loans will transfer those holdings to the bad bank, and in the process the transferer bank will remove those assets from its balance sheet - though it will have to write off a portion of the bad loans. Since bad bank exclusively deal in recovery of bad assets, it is possible for bad bank managers to focus on maximizing the value of its newly acquired high risk assets.
The idea of bad bank has resurfaced when Indian Banks' Association (IBA) has submitted a proposal to Reserve Bank of India (RBI) and the Ministry of Finance (MoF) to set up a bad bank for Rs 75,000 crore worth of non-performing assets. IBA has requested the MoF to contribute Rs 10,000 crore of initial capital. A panel headed by former PNB Chairman, Sunil Mehta, called Sashakt, had proposed the bad bank structure two years ago. IBA has proposed to set up an ARC owned by Government, and Asset Management Company (AMC) and Alternate Investment Fund (AIF) will be formed with the capital support from public as well as private sector. Fraud-hit accounts could be considered on case-to-case basis, with prior approval from regulator, for sell to the bad bank, in addition to other stressed assets. The PSBs NPA level stood at Rs 7.27 lakh crore as on 30th September 2019 whereas overall figure for banking industry would be around Rs 10 lakh crore. The proposal might come up for discussion at next meeting of Finance Minister with the Heads of Public Sector Banks (PSBs).
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