24 Jul 2021 India sets up bad bank to reduce debt burden, free up lenders

India sets up bad bank to reduce debt burden, free up lenders

Context

The Government has launched a Bad Bank with all the regulatory approvals in place.

Bad Bank

• A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
• It is an asset reconstruction company (ARC) or an asset management company

1. Takes over the bad loans of commercial banks
2. Manages them
3. Recovers the money over a period of time.

•  It helps commercial banks clean up their balance sheets and resolve bad loans. Such a bank is not involved in lending and taking deposits

Worldwide example

US-based BNY Mellon Bank created the first bad bank in 1988

Need for such a bad bank

• The idea gained currency during Rajan’s tenure as RBI Governor.
• The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
• However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
• ARCs have not made any impact in resolving bad loans due to many procedural issues.

Benefits

1. The continuous problem of NPAs can be tackled nicely.
2. Government presence mean speedy clean up
3. The world wide example has shown its success.

Download Yojna IAS Daily Current Affairs of 24th July 2021

rahul123

Yojna IAS Current Affairs Team