{"id":13952,"date":"2021-02-09T00:00:00","date_gmt":"2021-02-09T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/09-02-2021\/can-a-bad-bank-solve-the-growing-npa-crisis\/"},"modified":"2021-02-09T00:00:00","modified_gmt":"2021-02-09T00:00:00","slug":"can-a-bad-bank-solve-the-growing-npa-crisis","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/09-02-2021\/can-a-bad-bank-solve-the-growing-npa-crisis","title":{"rendered":"Can a \u2018bad bank\u2019 solve the growing NPA crisis?"},"content":{"rendered":"<p><strong>In News<\/strong>: Union Budget revived the idea of Bad Bank and Asset Reconstruction Company for dealing with the NPA crisis.<\/p>\n<p><strong>What is a Bad Bank?<\/strong><\/p>\n<p>A bad bank is a <strong>financial entity set up to buy non-performing assets (NPAs)<\/strong>, or bad loans, from banks.<\/p>\n<ul>\n<li><strong>Also known as Asset Reconstruction Company (ARC)<\/strong><\/li>\n<li><strong>Bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.<\/strong><\/li>\n<li><strong>Aim of setting up a bad bank<\/strong>\n<ul>\n<li>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.<\/li>\n<li>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.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Need for Bad Bank:<\/strong><\/p>\n<ul>\n<li>It will clean the balance sheet of Banks thus solving <strong>Twin Balance Sheet Problem<\/strong> of Indian Economy.<\/li>\n<li>It will aid the <strong>expansionary policy of the Government after Pandemic<\/strong>.<\/li>\n<li>Promote <strong>specialisation in dealing with Asset Reconstruction.<\/strong><\/li>\n<li><strong>It allows companies a graceful exit under Insolvency and Bankruptcy Code.<\/strong><\/li>\n<li><strong>PNB Chairman Sunil Mehta Panel<\/strong> also proposed setting up of Bad Bank for speedy and efficient management of Bad Loans.<\/li>\n<\/ul>\n<p><strong>Challenges before Bad Banks:<\/strong><\/p>\n<ul>\n<li>Chief Economic Advisor, K Subramanian has expressed his concern over <strong>pre-existing non-functional 28 ARCs<\/strong>.\n<ul>\n<li>Banks were unable to sell their bad loans to these entities.<\/li>\n<\/ul>\n<\/li>\n<li><strong>NPAs are expected to rise after COVID Pandemic<\/strong>\n<ul>\n<li>Impact of Covid-19 and the associated policy response is likely to result in an additional Rs 1,67,000 crore of debt from the top 500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22<\/li>\n<\/ul>\n<\/li>\n<li><strong>Former RBI governor Raghuram Rajan<\/strong> argued that a bad bank will merely <strong>shift<\/strong> <strong>bad assets from the hands of public sector banks<\/strong>, which are owned by the government, to the hands of a bad bank, which is again owned by the government.<\/li>\n<li><strong>Inefficient way<\/strong> to deal with bad loans as government owned Bad banks will end up paying more than real worth of stressed assets.<\/li>\n<\/ul>\n<p><strong>Way Forward:<\/strong><\/p>\n<p>The Bad Bank can be a good measure but not panacea. Different models which can be helpful in ensuring efficiency with minimal load on government has been discussed below.<\/p>\n<ul>\n<li><strong>RBI Deputy Governor Viral Acharya <\/strong>has proposed two models\n<ul>\n<li><strong>Private Asset Management Company (PMAC)<\/strong>: suitable for stressed sectors where the assets are likely to have an economic value in the short run, with moderate levels of debt forgiveness.<\/li>\n<li><strong>National Asset Management Company (NAMC): <\/strong>necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium terms<\/li>\n<\/ul>\n<\/li>\n<li>Further, institutional mechanisms like the <strong>Troubled Asset Relief Programme (TARP)<\/strong> of the <strong>US<\/strong> may be deployed to deal with stress in the financial system.<\/li>\n<\/ul>\n<p>Source: <a href=\"https:\/\/www.thehindu.com\/business\/Economy\/the-hindu-explains-can-a-bad-bank-solve-the-growing-npa-crisis\/article33770951.ece\" target=\"_blank\" rel=\"noopener\">TH<\/a><\/p>\n<p>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In News: Union Budget revived the idea of Bad Bank and Asset Reconstruction Company for dealing with the NPA crisis. What is a Bad Bank? A bad bank is a financial entity set up to buy non-performing assets (NPAs), or bad loans, from banks. Also known as Asset Reconstruction Company (ARC) Bad bank is not [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":13953,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13952","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/4999144current-affairs.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=13952"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13952\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/13953"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=13952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=13952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=13952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}