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