India sets up bad bank to reduce debt burden, free up lenders
The Government has launched a Bad Bank with all the regulatory approvals in place.
- 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
- Takes over the bad loans of commercial banks
- Manages them
- 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
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.
- The continuous problem of NPAs can be tackled nicely.
- Government presence mean speedy clean up
- The world wide example has shown its success.