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Bad Bank in Indian Context - An Overview

Bad Bank in Indian Context - An Overview
Bad Bank in Indian Context - An Overview

The problem of rising NPAs (Non performing Assets) is increasing day by day. The NPA are threatening the Indian economy and the recent incidents of crackdown of the high profile defaulter Kingfisher Owner Vijay Mallya have fetched the attention of RBI. According to the economic survey 2017, ‘’NPA is an economic problem, not a morality play”. Here comes the importance of Bad Bank. A Bad Bank will take over all the bad loans and help to sell the property to a private market. It will work as a ‘Public Sector Asset Rehabilitation Agency’ (PARA) and will have 49% govt. ownership.
Features of Bad Bank:
  • 5/25 Scheme- Under this scheme a bank can extend long term loans of 20-25 years to match the project’s cash flow. As well as the project must be refinanced after every 5/7 years.
  • Debt Restructuring Strategy-The bank will have the right to convert the part or full of their loans into equity shares in the company which has taken the loan.
  • Sustainable Structuring of Stressed Assets Scheme- The liabilities of the debt of a struggling company will be divided into sustainable and unsustainable parts. The bank will convert the unsustainable part of the equity and sell it to a new owner.
  • Private owned Asset Reconstruction Companies- The ARC will take over the NPA against a lower but fixed cost from the banks along with the pre-decided security of the loan. Then ARC will issue the security receipts at a fixed interest rate and thus will increase the money.

How it will Work:
According to the Governor of RBI, proper designing of this bank is very important for its effective working. Getting the right price after selling the assets to the private investors is the key point here. To determine the right price, some basic principles must be followed.

  • According to the banking regulation, a regulated institution must be safe and sound. These two regulations are called Solvency Regulation.
  • Solvency Regulation ensures that the small depositors must not suffer any loss in case of insolvency of a financial institution.
  • On the other hand, the Solvency Regulation also ensures that the overall asset values always must be more than the values of liabilities.

According to the economic survey 2017, the asset values tend to fall below the liabilities. Here comes the importance of PARA to fix the problem. The main function of PARA is to clean up the balance sheets of the banks. The 2017 budget provided only 10000 Crore for bank recapitalization which is much lower than the last year.

There are more than 20 ARC in operation. Among them, many companies are privately owned. But the private ARCs take over only 4% to 5% of the total NPA amount. As the banks fear to write down the exact amount of loss to avoid vigilance action, the ARCs cannot offer more. Being a Govt. owned entity; PARA can be able to bring many creditors to agree on write downs. PARA must show the urgency to recover the cash. Even with bankruptcy, PARA must be guided by the approach to restore the industry as far as possible. It will maintain a proper balance between autonomy and institutional accountability.
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