Bad Bank: why is it being described as good for banks? (Detailed)

Bad Bank: The name of this bank is ‘Bad’, so why is it being described as good for banks?. The Indian Banks Association (IBA), an institution of banks, proposed to the Finance Ministry and the Reserve Bank of India on May 12 that a bad bank be set up in the country. Bad bank can become a relief for the banks of India, ie it can be a very good step for our economy and banking system.

  • Indian Bank Association has demanded the creation of Bad Bank
  • This bad bank will handle the NPAs of banks
  • It has been discussed for the last five years

The Indian Banks Association has proposed to make the government a ‘bad bank’. If this proposal is accepted then this bad bank can become a relief for the banks of India, ie it can be a very good step for our economy and banking system. Now it seems surprising that what is being called a bad bank is good for the banking system. Let’s examine it.

The Indian Banks Association (IBA), an institution of banks, proposed to the Finance Ministry and the 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 has also demanded an initial capital of Rs 10,000 crore from the government.

Also read: What is the matter of credit rating?

This bad bank will actually be a third party which 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 the 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.

What is NPA and Bad loan

Let us first know what NPA is. When a person or institution takes a loan from a bank, many times they are unable to repay the loan. Sometimes due to such compulsions, many times the purpose of people is to fraud. When that person or institution stops paying the entire loan or installment of the remaining loan, it is called a defaulter. Maybe the defaulters start paying after a few days, or maybe after a couple of installments. Or after some followup.

Willful defaulters are those borrowers who despite being competent are not intentionally repaying the loan. But when there is no hope of repaying the loan from them, banks write off their loan, that is, write it off. This is not a loan waiver, but such a loan is considered almost drowned and it is under the rules of the Reserve Bank.

According to RBI rules, first such loan is considered as non performing asset i.e. NPA. Then even after this, when they are not recovered and the chances are very less, then this NPA is written off, that is written off. NPAs are called bad loans or stuck loans.

In the last 3 years, the NPA of banks has increased by Rs 1.44 lakh crore and it has increased from Rs 7.92 lakh crore to Rs 9.36 lakh crore.

When did the idea come first

Bad bank will be like a third party which will manage the bad loans of banks. 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 this came Bad Bank 2.0. 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. In this, a National Asset Reconstruction Company Limited (NARCL) was set up, for which the government should support the funding. Talk about giving it some regulatory exemption from the Reserve Bank for transfer of fraudulent accounts.

The thinking behind this is that banks should focus on their debt growth and other growth and Bad Bank should manage 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. This will not remove the structural problem of NPAs of banks.

What is the expert saying

Harihar Mishra, an expert in Business Today, writes, ‘NPA is like an epidemic. All three measures have to be taken to deal with it. 1. Vaccine – preventing the preparation of new NPAs on a large scale 2. Quarantine Center – on which the proposed Bad Bank is the focus. 3. Ventilators – Arrangement of risk capital so that banks improve and exit.

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