Read about the concept of Bad Bank to get rid of NPA problem of Banks

Indian Government banks are consistently facing the problem of Non-Performing Assets. So to get rid of this problem, the concept of bad banks and the merger of banks had been introduced. So here we will see the concept of a bad bank.

Bad bank is an economic concept through which losses in times of economic crisis are transferred by the banks running their liabilities to a new bank. When the non-performing assets of a bank exceeds the limit, a bank is formed on the assurance of the state that holds the liabilities of the main bank for a fixed time.

Economic challenges were faced in Sweden during 1991–92. In 2012, Spain resorted to such banks during the economic crisis. Bad Bank’s strategy was adopted by “Melon Bank”, which was of America. The bad bank will be a bank that will buy the sinking debt of other banks. With this, the pressure to recover the sinking debt of other banks will be removed. As a result, other banks will be able to focus on providing new loans.

The Indian Banks Association (IBA), an institution of banks, proposed to the Ministry of Finance and Reserve Bank of India on May 12 that a ‘bad bank’ be set up in the country. In the news from sources in the media, it has been told that the IBA had also demanded an initial capital of Rs 10,000 crore from the government.

This bad bank will actually be a third party that will buy the bad loans of banks and will recover the debt itself. In this way, the banks will clean their bookkeeping and bad bank will earn profit. It is seen as a troublesome or panacea treatment for growing non-performing assets (NPAs) in the country’s financial system. But some experts say that it can actually play the role of quarantine center for NPA more than any vaccine or ventilator.

The idea of ​​creating a bad bank in India first came in the Economic Survey 2016-17. It was then said that a Public Sector Rehabilitation Agency (PARA) should be formed to deal with the problem of NPAs of public banks. With this idea, Bad Bank took seed. It can be called Bad Bank 1.0.

After that, Bad bank 2.0 has been introduced. In 2019, a committee of three bankers constituted by the government made a suggestion under which the project was recommended strong. It suggested loans above Rs 500 crore to an Asset Management Company (AMC) and an Alternative Investment Fund (AIF) as was also stated in the proposed Bad Bank. The committee suggested that loans under Rs 500 crore should be resolved by an inter-creditor agreement or up to Rs 50 crore by the bank itself.

Now the proposal that has come can be called Bad Bank 3.0. It said that a National Asset Reconstruction Company Limited (NARCL) was set up, for which the government should support the funding.

The thinking behind this is that banks should take care of their debt growth and other progress and Bad Bank should take care of their problem of NPA management. It has become even more important in the times of economic crisis in the country that bad accounts of banks should be kept in quarantine and they should keep such bad accounts away from healthy credit so that economic growth will be supported.

It will happen that a large part of the NPAs of the banks will go to the Bad Bank and the bookkeeping of the banks will look neat. However, this will only solve the problem temporarily.