Explained - What is 'Bad Bank' ?

Introduction :-

The concept of having a ‘Bad Bank’ is being considered by the government to enable them to get back to business. This Bad Bank will handle the bad business of other banks & freeing them of the burden of resolving their bad loans themselves.

Why the term 'Bad bank' is in news ?

Recently Finance minister Piyush Goyal announced that a bankers’ panel would look at the feasibility of setting up this Bad Bank. A committee headed by Punjab National Bank chairman Sunil Mehta would look at the need for an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) to take over bad loans of PSBs & That company will be called as Bad Bank.

What is a Bad Bank?

A bad bank is essentially the government's financial help to banks. A bad bank is an entity or structure that buys non-performing assets (NPAs) or distressed loans from banks and financial institutions (FIs), mostly at a discounted market price. It then works to recover and turnaround the assets through professional management, sale or restructuring. This helps banks or FIs clear-off their balance sheets by transferring the bad loans and focus on its core business lending activities.

Idea of Bad Bank :- 

The idea of bad bank gained currency when the Economic Survey 2017 suggested creation of a 'Public Asset Rehabilitation Agency' (PARA) to help tide over the enormous problem of stressed assets. Chief Economic Advisor Arvind Subramanian neatly summed up how a bad bank can help PSU banks saddled with huge non-performing assets (NPAs) by borrowing a quote from Sherlock Holmes: “Once you have eliminated the impossible, whatever remains, no matter how difficult, must be the solution.”

How 'bad' are India's PSU banks ?

• The 21 banks majority-owned by the government, which account for two-thirds of banking assets in the country, hold close to 90 percent of bad loans. 
• Gross NPAs of banks increased to around Rs 10.3 lakh crore, or nearly 11.2% of advances, as on March 31, 2018, compared with Rs 8 lakh crore, or around 9.5% of advances, as on March 31, 2017. 
• Higher provisioning and the resultant losses have materially eroded the Rs 1.2 lakh crore of capital raised by PSBs last fiscal, of which Rs 90,000 crore was from the government in the form of a bail-out plan. 
• Crisil has said the government's bailout plan may not be enough. “Given the higher-than-expected losses last fiscal, probable loss in the current fiscal, and recall of the Additional Tier 1 instruments by a few PSBs, the Rs 2.1 lakh crore recapitalisation program announced in October 2017 may be insufficient to meet the capital requirements of PSBs by the end of this fiscal."

Success or Failure ?

The concept of a bad bank has been experimented in several countries especially after the financial crisis of 2008-09. It has witnessed some success in places like Malaysia, Sweden, Spain and few other countries. However, it must be properly implemented and can probably be the starting-point for broader reforms to turnaround the banking sector, which is the backbone of any economy.