{"id":77602,"date":"2021-01-19T19:01:15","date_gmt":"2021-01-19T13:31:15","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=77602"},"modified":"2021-03-26T18:09:47","modified_gmt":"2021-03-26T12:39:47","slug":"establishment-of-bad-banks-associated-issues-and-significance","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/establishment-of-bad-banks-associated-issues-and-significance\/","title":{"rendered":"Establishment of Bad Banks \u2013 associated Issues and Significance"},"content":{"rendered":"

As a result of the\u00a0<\/span>Covid-19<\/span>\u00a0<\/span>pandemic induced economic\u00a0<\/span>slowdown<\/span>, t<\/span>h<\/span>e\u00a0<\/span>c<\/span>ommercial banks<\/span>\u00a0<\/span>are\u00a0<\/span>about to\u00a0<\/span>witness\u00a0<\/span>the<\/span>\u00a0spike in NPAs<\/span>, or bad loans<\/span>.\u00a0<\/span>To deal with it,\u00a0<\/span>Reserve Bank of India (RBI) Governor<\/span>\u00a0is considering\u00a0<\/span>the proposal for the creation of a bad bank.<\/span>\u00a0<\/span>\u00a0<\/span><\/p>\n

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What is\u00a0<\/b>a\u00a0<\/b>Bad Bank?<\/b>\u00a0<\/span><\/p>\n

A<\/span>\u00a0<\/span>bad bank is an asset reconstruction company (ARC)<\/span>,\u00a0<\/span>involved in management and recovery of bad loans<\/span>\u00a0or NPAs<\/span>\u00a0of\u00a0<\/span>o<\/span>the<\/span>r<\/span>\u00a0banks.\u00a0<\/span>\u00a0<\/span><\/p>\n

Generally,<\/span>\u00a0t<\/span>he<\/span>se<\/span>\u00a0Banks are i<\/span>nitially funded by the government<\/span>\u00a0and gradually<\/span>,\u00a0<\/span>banks and other investors\u00a0<\/span>start<\/span>\u00a0<\/span>t<\/span>o<\/span>\u00a0<\/span>co-invest<\/span>\u00a0in them<\/span>.\u00a0<\/span>\u00a0<\/span><\/p>\n<\/div>\n

What\u00a0<\/span><\/b>a<\/span><\/b>re the functions of Bad banks?<\/span><\/b>\u00a0<\/span><\/p>\n

Commerci<\/span>al<\/span>\u00a0and Public Sector\u00a0<\/span>Banks<\/span>\u00a0<\/span>(<\/span>PSBs)<\/span>\u00a0sell their NPAs\u00a0<\/span>to the<\/span>\u00a0bad bank.<\/span>\u00a0<\/span>The bad bank<\/span>\u00a0manage<\/span>s<\/span>\u00a0<\/span>the\u00a0<\/span>NPAs\/<\/span>bad loans\u00a0<\/span>and finally recovers the money over time<\/span>.\u00a0<\/span>The takeover of bad loans is normally below the book value of the<\/span>m<\/span>.<\/span>\u00a0<\/span>The<\/span>se<\/span>\u00a0bank<\/span>s<\/span>\u00a0<\/span>are<\/span>\u00a0<\/span>not\u00a0<\/span>involved in\u00a0<\/span>activities like\u00a0<\/span>lending and taking deposits<\/span>.\u00a0<\/span>\u00a0<\/span><\/p>\n

For example,\u00a0<\/span>consider a steel plant<\/span>\u2019s loan<\/span>\u00a0<\/span>with SBI,\u00a0<\/span>turned into\u00a0<\/span>a<\/span>n<\/span>\u00a0<\/span>NPA<\/span>.<\/span>\u00a0Bad bank purchases this<\/span>\u00a0NPA<\/span>\u00a0from\u00a0<\/span>the\u00a0<\/span>SBI.<\/span>\u00a0<\/span>After that<\/span>,<\/span>\u00a0the\u00a0<\/span>bad bank appoints\u00a0<\/span>domain\u00a0<\/span>experts\u00a0<\/span>to manage the a<\/span>ssets<\/span>\u00a0of the plant\u00a0<\/span>with an aim to<\/span>\u00a0maximize revenues and cut losses. This is called reconstruction and increases the economic value of the plant. When\u00a0<\/span>the\u00a0<\/span>bad bank sells this plant,\u00a0<\/span>it<\/span>\u00a0will recover more money.<\/span>\u00a0<\/span><\/p>\n

T<\/span>he first bad bank\u00a0<\/span>was created\u00a0<\/span>in 1988<\/span>\u00a0by the US-based Mellon Bank. A<\/span>fter\u00a0<\/span>that<\/span>,<\/span>\u00a0<\/span>a\u00a0<\/span>similar<\/span>\u00a0<\/span>concept has been implemented in other countries including Finland,\u00a0<\/span>Sweden,\u00a0<\/span>France and Germany.\u00a0<\/span>\u00a0<\/span><\/p>\n

Concept of\u00a0<\/span><\/b>Bad<\/span><\/b>\u00a0<\/span><\/b>bank<\/span><\/b>\u00a0in India:<\/span><\/b>\u00a0<\/span><\/p>\n