Economy

KEY POINTS

Bad Bank

·         A bad bank is one, set up to buy the bad loans of another bank with significant nonperforming assets.

·         By transferring such assets to the bad bank, the original institution may clear its balance sheet.

·         It would take on public sector banks’ chronic bad loans and focus on their resolution and the extraction of any residual value from the underlying asset.

·         Technically, a bad bank is said to be an Asset Reconstruction Company (ARC) or Asset Management Company (AMC).

“For” arguments –

·         Hiving off stressed loan accounts to a bad bank would free public sector bank balance sheets from their deleterious impact and improve their financial position.

·         This would allow government-owned banks to focus on their core operations of providing credit for fresh investments and economic activity.

·         If managed well, a bad bank can clean up bank balance sheets and get them to start lending again to businesses.

“Against” arguments

·         This approach would simply shift the soured debt from banks to another firm.

·         It is difficult to devise a transparent method, free from political interference and conflict of interest, for identifying the assets to be moved.

·         It will not address the more serious corporate governance issues plaguing public sector banks that led to the NPA problem in the first place.

·         This concept may not be relevant for India since much of the assets backing the banks’ loans are viable or can be made viable.

·         E.g. a large chunk of projects stalled due to extraneous factors like problems in land acquisition or environmental clearance.

·         They just need restructuring and additional funding.

·         There are issues with respect to composition and management of the Bad Bank.

·         A majority stakes with government would render the Bad Bank with the same issues of governance and capitalization as PSBs.

·         On the other hand, a private majority shareholding could invite criticism of favouritism and corruption if the loans are not priced appropriately when transferred to a ‘bad bank’.