BLOOMING INSIGHTS

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 Reconstructi...

Our finance minister, Nirmala Sitharaman, has announced that Center would be setting up Bad Banks to take the stress off of financial institutions. It wouldn’t be said an unanticipated doing as the plan isn’t new and has been talked about many times in the past few years, but it certainly was a little shock nonetheless. Indian markets aren’t used to have Bad Banks around. What is a Bad Bank? Speaking in layman’s tongue a Bad Bank is just a dumping ground for banks to put all its bad assets. Now assume a bank carrying a very heavy bag with lots of assets, and when the weather gets deteriorated (economy goes down), that heavy bag will most probably lead the bank to its demise. In such case, the bank could make a sperate subsidiary and transfer all of its toxic (potentially and existing) and non-performing assets to it, at their actual realizable value, which, of course, is lesser than book value. Bank does get hit by a sudden loss in this way, but this helps it survive through the worsen...