Bad Banks: An Overview
The menace of non-performing assets (NPA) has long crippled the growth of the banking sector in India and has incapacitated from whole-heartedly participating in the economic growth process. The COVID-19 pandemic has further aggravated the position, as a result, the NPAs which had reached below 10% in pre-covid times have again crossed the 10% mark. Seeing the gravity of the situation, Honourable Finance Minister Nirmala Sitharaman, in her budget, announced the setting up of "ASSET RECONSTRUCTION COMPANIES'', to solve the peril of NPAs.
But
what is a BAD BANK????
Bad Banks and their Structure
In simpler words, a bad bank is an asset reconstruction company that engages in buying bad loans (NPAs) from the commercial banks at discount and tries to recover the money from the defaulter by recommending a systematic solution over some time.
The Govt has decided that the bad bank structure will consist of two asset reconstruction companies viz., National Asset Reconstruction Co. Ltd(NARCL) and Indian debt Resolution Company Ltd (IDRCL), and in both of these companies, the share of Public-Sector banks will be more than or equal to 51%. Therefore, the bad bank structure will be NARCL collecting debts from banks and IDRCL to dispose of these NPAs, but how will these work???
Working of Bad Bank in India?
These
companies will deal only with NPAs worth more than 500 crores. So, first of
all, NARCL will buy these NPAs from banks and will give 15% in cash and the
remaining 85% in form of security receipts. These NPAs will be then transferred
to IDRCL which will try and sell these assets off and restore as much money as
possible from such sales. The money, then, will be transferred back to the
company, in return for security receipts earlier given.
But
what if the whole amount promised by NARCL to banks could not be restored.
Here, the government comes into play. The government recently announced a
guarantee of 30000 crores. If any difference arises out of the sale of these
assets, this amount of 30k crore will be utilized to settle the claims of banks
For example, if a company buys NPAs worth 600 crores from banks and IDRCL is only able to reclaim assets worth 500 crores, then, 30k crores will be used to settle 100 crores.
But what are its benefits, will not other ARCs run out of business???
Benefits of NARCL-IDRCL
Many experts believe that these companies will be lucrative in solving the "Twin Balance sheet" problem i.e., NPAs of banks and increasing liabilities of corporations; the major reason being the availability of funds that are not available to private ARCs.
As it
will be only dealing with high net worth NPAs, other ARCs will benefit from it,
as they will be able to divert their attention towards reconstructing other
NPAs.The addition of "Swiss Challenge'' further acts as "Cherry on
Top".
However, the challenges persist.
Challenges
The major challenge as seen in earlier ARCs is the dearth of quality professionals that inhibits an ARC from realizing its true potential.
Another major challenge as recognized by many experts is that it may lead to "Bad Bankization" of loans i.e., banks may become lenient concerning the collection of loans or may start giving improperly scrutinized loans.
Conclusion
The COVID-19 pandemic has hurt the entire economy and mired the bank with high NPAs. While setting up these banks is an idea that deserves proper approbation, however, more needs to be done. For example, implementing the recommendations of the Sunil Mehta committee and the recently set up Sudarshan Sen committee will be a great step towards handling this menace of rising NPAs.
Written by Taranjeet Singh (Guest Contributor)
References
- https://www.thehindu.com/business/Economy/explained-what-is-the-need-for-a-bad-bank/article36544241.ece
- https://www.thehindu.com/opinion/editorial/the-endgame-on-the-new-bad-bank/article36577992.ece
- https://www.thehindu.com/opinion/op-ed/will-a-bad-bank-fix-indias-broken-banking-system/article36885048.ece
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