What is in news : Government of India has brought to the notice of Parliament a bad bank has been set up with regulations
What is a bad bank : A bad bank is technically an asset reconstruction company that buys bad loans(NPAs) from the commercial banks at a discount and tries to recover the money from the defaulter by providing a systematic solution over a period of time.
What is a need for a bad bank :
- Absorb NPA & ease the provisioning requirement by the banks as per basel norms
- Allows the segregation of a bank’s good assets from its bad assets.
- Allows investors to assess its financial health with greater clarity
- Assets having future demand-supply issues face liquidation under the IBC, which is resolved by a bad bank
What may be the challenges :
- Mobilising Capital in a pandemic hit economy
- Adequate governance reforms
- The price at which bad assets are transferred from commercial banks to the bad bank will not be market-determined and price discovery will not happen.
- Banks may continue reckless lending practices, without any commitment to reduce NPAs