{"id":114929,"date":"2021-06-26T10:40:57","date_gmt":"2021-06-26T05:10:57","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=114929"},"modified":"2021-06-26T11:27:54","modified_gmt":"2021-06-26T05:57:54","slug":"lesson-from-china-on-bad-banks","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/lesson-from-china-on-bad-banks\/","title":{"rendered":"Lesson from China on bad banks"},"content":{"rendered":"\n<p><b><span data-contrast=\"none\">Relevance:\u00a0<\/span><\/b><span data-contrast=\"none\">There is a debate going on in India to open <a href=\"https:\/\/forumias.com\/blog\/bad-bank-for-strengthening-the-banking-sector\/\">bad bank\u00a0<\/a>for\u00a0solving\u00a0the NPA\u00a0problem with banks.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"none\">Synopsis\u00a0\u2013<\/span><\/b><span data-contrast=\"none\">\u00a0To address stressed assets [nonperforming loans (NPLs), a bad bank must have a fixed term and a narrow mandate with clear aims.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n<h5><b><span data-contrast=\"none\">What are bad banks?<\/span><\/b><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/h5>\n<p><span data-contrast=\"none\">A \u2018bad bank\u2019 is designated financial institutions that\u00a0<\/span><b><span data-contrast=\"none\">purchase and resolve nonperforming\u00a0assets\u00a0(NPAs) from banks\u00a0<\/span><\/b><span data-contrast=\"none\">and help banks\u00a0to help clear their balance sheets.\u00a0<\/span><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"none\">NARCL- National Asset Reconstruction Company Ltd,<\/span><\/b><span data-contrast=\"none\">\u00a0<\/span><span data-contrast=\"none\">the proposed bad bank for taking\u00a0over stressed assets of Banks,\u202fwas announced in the Budget for 2021-22.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n<h5><b><span data-contrast=\"none\">Lesson for India from China\u2019s bad banks<\/span><\/b><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/h5>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"13\" data-aria-level=\"1\"><b><span data-contrast=\"none\">First,\u00a0Bad banks should have a finite tenure\u00a0&#8211;\u00a0<\/span><\/b><span data-contrast=\"none\">The bad bank should resolve these bad assets within\u00a0a\u00a0fixed period of time.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"14\" data-aria-level=\"1\"><b><span data-contrast=\"none\">Second,\u00a0Bad banks should have narrow mandate\u00a0<\/span><\/b><span data-contrast=\"none\">with clearly defined goals and clear resolution strategy\u00a0to resolve NPAs.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"15\" data-aria-level=\"1\"><b><span data-contrast=\"none\">Third,<\/span><\/b><span data-contrast=\"none\">\u00a0Policymakers must ensure that the\u00a0NARCL\u2019s establishment has no influence on RBI\u2019s initiative to reduce bank holding in security receipts (SRs).<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"16\" data-aria-level=\"1\"><b><span data-contrast=\"none\">Forth,\u00a0NPAs\u00a0resolution should\u00a0take place\u00a0through a market<\/span><\/b><span data-contrast=\"none\">\u00a0<\/span><b><span data-contrast=\"none\">mechanism<\/span><\/b><span data-contrast=\"none\">\u00a0and not through a multitude of bad banks.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"o\" data-font=\"Courier New\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"10\" data-aria-level=\"2\"><b><span data-contrast=\"none\">The regulatory arbitrage between ARCs and AIFs must stop\u00a0<\/span><\/b><span data-contrast=\"none\">with the establishment of NARCL as a centralized bad bank.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0a7\" data-font=\"Wingdings\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"3\"><span data-contrast=\"none\">AIFs should be allowed to purchase bad loans directly from banks and have\u00a0enforcement rights under the\u00a0<\/span><b><span data-contrast=\"none\">SARFAESI Act.<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0a7\" data-font=\"Wingdings\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"3\"><span data-contrast=\"none\">ARCs should be allowed to purchase stressed assets from mutual funds, insurance companies, bond investors and ECB lenders.\u202f<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0a7\" data-font=\"Wingdings\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"3\"><span data-contrast=\"none\">ARC trusts should be allowed to infuse fresh equity in distressed companies, within IBC or outside of it.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\uf0a7\" data-font=\"Wingdings\" data-listid=\"12\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"3\"><span data-contrast=\"none\">The manager\/sponsor of ARCs shall maintain the same level of interest as AIFs, i.e., at least 2.5 percent in each scheme or\u00a0Rs\u00a05\u00a0crore, whichever is lower.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/li>\n<\/ul>\n<h5><b><span data-contrast=\"none\">Way forward-<\/span><\/b><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/h5>\n<p><span data-contrast=\"none\">The policymaker should learn from China\u2019s mistake and should limit the mandate and tenure of NARCL while facilitating market-based mechanisms for bad loan resolution in a steady state.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Read more:<\/span><span data-ccp-props=\"{&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:276,&quot;469777462&quot;:[987],&quot;469777927&quot;:[0],&quot;469777928&quot;:[1]}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"37\" aria-setsize=\"-1\" data-aria-posinset=\"17\" data-aria-level=\"1\"><a href=\"https:\/\/forumias.com\/blog\/establishment-of-bad-banks-associated-issues-and-significance\/\"><b><span data-contrast=\"none\">Establishment of Bad Banks \u2013 associated Issues and Significance<\/span><\/b><\/a><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:276,&quot;469777462&quot;:[987],&quot;469777927&quot;:[0],&quot;469777928&quot;:[1]}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"none\">Source-\u00a0<\/span><\/b><a href=\"https:\/\/indianexpress.com\/article\/opinion\/columns\/india-bad-bank-national-asset-reconstruction-company-china-7374608\/\"><b><span data-contrast=\"none\">The Indian Express<\/span><\/b><\/a><span data-ccp-props=\"{&quot;335559739&quot;:200,&quot;335559740&quot;:276}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance:\u00a0There is a debate going on in India to open bad bank\u00a0for\u00a0solving\u00a0the NPA\u00a0problem with banks.\u00a0 Synopsis\u00a0\u2013\u00a0To address stressed assets [nonperforming loans (NPLs), a bad bank must have a fixed term and a narrow mandate with clear aims.\u00a0 What are bad banks?\u00a0 A \u2018bad bank\u2019 is designated financial institutions that\u00a0purchase and resolve nonperforming\u00a0assets\u00a0(NPAs) from banks\u00a0and help&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/lesson-from-china-on-bad-banks\/\">Continue reading <span class=\"screen-reader-text\">Lesson from China on bad banks<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,8043,9],"tags":[8046,8243,216],"class_list":["post-114929","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-current-affairs-cat","category-public","tag-asset-reconstruction-company","tag-bad-banks","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704946342},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/114929","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=114929"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/114929\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=114929"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=114929"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=114929"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}