Cleaning up balance sheets

Cleaning up balance sheets

News:

1-The government has revived the idea of setting up an asset reconstruction or asset management company, a sort of ‘bad bank’ first mooted by Chief Economic Adviser Arvind Subramanian last year.

Important facts:

2-Bad Bank

• Bad bank purchase those assets from public sectors bank that has no salvage value
• they help to extract any residual value from those assets.
• this also helps to clean up bank balance sheet. Thus bank focus on their core operations of providing credit and enhance economic activity
• this also protect the bank from danger of insolvency

3. The CEA had proposed a significant part of the bad bank funding to come from the Reserve Bank of India.

4.The chances of private participation are low unless investors are allowed a major say in the governance of the new entity.

5. Critics consider establishment of bad bank as an indirect bailout of Public sector banks.
6. However, it will not solve the problem of corporate governance issues that led to NPA problem.