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- A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions, which clears their balance sheet.
- This was based on an idea proposed by a panel on faster resolution of stressed assets in public sector banks headed by former PNB Chairman Sunil Mehta.
- Adverse effects of Covid-19 on economic activity.
- Slump in earnings of companies and individuals could lead to a jump in non-performing assets.
- Various analysts suggest that in a couple of years, the proportion of stressed assets in the banking system could jump to as high as 18 per cent from around 11 per cent at present.
- The government’s view is that bad loan resolution should happen in a market-led way, as there are many asset reconstruction companies already operating in the private space.
- The government has significantly capitalised state-owned banks in recent years and pursued consolidation in the PSU banking space.
- In the last three financial years, the government has infused equity of Rs 2.65 lakh crores into state-owned banks.
- Insolvency resolution under the Insolvency and Bankruptcy Code (IBC) is adequate to the tackle the challenge of bad loans. Thus, Government argues that there is no need for Bad bank.
- The central bank has so far never come out favourably about the creation of a bad bank with other commercial banks as main promoters.
- Former RBI Governor Raghuram Rajan had opposed the idea of setting up a bad bank with a majority stake by banks, arguing it would solve nothing.
- Rajan argued that a government-funded bad bank would just shift loans “from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters”.
- 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 would still prevail.
-So, according to banking experts, Bad bank will not achieve anything.
- Enactment of IBC has reduced the need for having a bad bank, due to it being transparent and open process.
- Banks recovered on average 42.5% of the amount filed through the IBC in 2018-19, against 14.5% through the SARFAESI, 5.3% through Lok Adalats and 3.5% through Debt Recovery Tribunals.
- Private Asset Management Company: It would be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness.
- National Asset Management Company: for sectors where the problem is not just of excess capacity, but possibly also of economically unviable assets in the short- to medium-term, such as in the power sector.
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