THE CONTEXT: The Government has informed the parliament on July 20 that it has launched a Bad Bank with all the regulatory approvals in place.
Analysis
- The Finance Minister, in her speech on the Budget for the financial year 2021-22, had announced that an Asset Reconstruction Company Limited and Asset Management Company would be set up
- They will consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.
ABOUT BAD BANK
- A bad bank is a financial entity set up to buy non-performing assets (NPAs), or bad loans, from banks.
- The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints.
- After the purchase of a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in purchasing it.
- A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it paid to acquire the loan from a commercial bank.
- However, generating profits is usually not the primary purpose of a bad bank the objective is to ease the burden on banks, holding a large pile of stressed assets, and to get them to lend more actively.
- Finance Minister in her Budget speech revived the idea of a ‘bad bank’ by stating that the Centre proposes to set up an asset reconstruction company to acquire bad loans from banks.
- In pursuance to this, the National Asset Reconstruction Company Limited (NARCL) has been set up by the government
- RBI is the regulator of Asset Reconstruction Companies and thus will regulate the NARCL also.
