April 17, 2024

Lukmaan IAS

A Blog for IAS Examination



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.


  • 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.


  • 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.
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