Have u ever heard of bad bank? Well, in this article we will know about what bad bank is and how is it taking shape in India.
So to start over, A bad bank is a financial entity that was formed to purchase the risky loans and other illiquid assets of another financial institution. The company with many nonperforming assets will sell them to the bad bank at market value. The goal of Bad Bank is to bring financial stability to the banking industry. It would store bad loans for public sector banks, which will be offered to investors at a discount which will eventually assist banks in cleaning up their balance sheets.
Recently, Nirmala Sitharaman, the Union Finance Minister, has announced the establishment of a bad bank in the nation. Sitharaman said in her budget address that an Asset Reconstruction Company Limited and an Asset Management Company will be established to manage the bad debt of public sector banks such as the State Bank of India, Punjab National Bank, and others.
However, Experts were perplexed by this because IBC known as insolvency and bankruptcy code was considered to be pretty efficient in settling problematic debts. But the government was concerned about delays and low asset realization under the IBC. Furthermore, the loans were offered at steep discounts. The assets were liquidated in some circumstances. There were also issues regarding the public sector bank’s(PSB) lack of cooperation.
So, to consolidate and take over the current stressed debt, an ARC and AMC will be established. It will then manage and sell the assets to Alternative Investment Funds and other potential buyers in order to realize their full worth. To put it another way, it will store bad loans for public sector banks, which will subsequently be sold to investors at a lower cost which will aid in the cleaning up of the balance sheet and will eventually lessen the financial burden of future capital requirements. So, India’s bad bank is now taking form. With the formation of the National Asset Reconstruction Company Ltd, the much-anticipated wait for the “Bad Bank” came to an end.
Given its size and development potential, the Indian economy will experience a steady supply of distressed assets. When the one-time loan arrangement finishes, Covid-19 will be a source of concern for many businesses. For public sector banks, the existing portfolio of problematic loans is a major source of concern. As of September 2020, the banking system’s total gross nonperforming assets (NPAs) accounted for 7.5% of the entire loan book.
This is anticipated to rise to 13.5 percent by March-September this year, according to the Reserve Bank of India (RBI). Moreover, Many people believe that running a bad bank successfully necessitates a variety of factors. One, it must be for a defined purpose and include a time limit. For instance, Sweden AMC, supported by the government, recovered over 90% of bad loans in six years in the early 1990s. However, the Chinese AMC, which is supported by the government, failed to deliver. Now it’s up to NARCL, private ARCs, and IBC to preserve the value of stressed assets by restructuring and resolving them in a timely manner.