{"id":97385,"date":"2021-03-24T23:30:06","date_gmt":"2021-03-24T18:00:06","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=97385"},"modified":"2021-03-25T10:44:53","modified_gmt":"2021-03-25T05:14:53","slug":"bad-bank-for-strengthening-the-banking-sector","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/bad-bank-for-strengthening-the-banking-sector\/","title":{"rendered":"Bad Bank for strengthening the banking sector"},"content":{"rendered":"\n<p><b>Synopsis<\/b><span style=\"font-weight: 400;\">: Indian banks have started to recover post the pandemic phase. Moreover, the banks will strengthen after the creation of a bad bank as promised in the budget.<\/span><\/p>\n<h5><b>Background<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li>During the pandemic, NPA(Non-Performing Assets) was expected to rise. Thus, <span style=\"font-weight: 400;\">Indian banks have written off their balance sheets.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A write-off is an accounting term through which the book value of an asset is declared to be zero.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">An NPA is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">However, later at the end of the year, a positive recovery was observed. Restructuring requests were reduced and Provision Coverage Ratios (PCR) improved.<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">PCR is the ratio of provisioning to Gross Non-Performing Assets.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It indicates the extent of funds a bank has kept aside to cover loan losses.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the recent budget 2021, the government announced a dedicated <a href=\"https:\/\/forumias.com\/blog\/bad-banks\/\">bad bank<\/a>.<\/span><\/li>\n<\/ul>\n<p><b>Reasons behind improvement in the banking system at the year-end<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Before the pandemic, banks held substantial capital and <\/span><b>built a sizable buffer <\/b><span style=\"font-weight: 400;\">for dealing with the NPAs. This prevented major degradation of their balance sheets during the pandemic. Further many other reasons were behind this performance.<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Before the pandemic, the RBI instilled <\/span><b>a prudent degree of financial discipline <\/b><span style=\"font-weight: 400;\">in the market. This included decreasing exposure in riskier assets and devising a system of ratings for the borrowers.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A <\/span><b>surge in disposable income<\/b><span style=\"font-weight: 400;\"> and spending capacity of middle-class people will be witnessed. This would cause the valuation of personal financial assets in Asia to reach $69 trillion by 2025. Therefore, bringing more business to India as well.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Further, the <\/span><b>robust monetary management skills of RBI<\/b><span style=\"font-weight: 400;\"> and <\/span><b>budget announcements<\/b><span style=\"font-weight: 400;\"> created a sense of positivity in the sector.\u00a0\u00a0<\/span><\/li>\n<\/ol>\n<h5><b>Budget Announcements<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A bad bank will be created under an Asset Reconstruction Company (ARC)-Asset Management Company (AMC) structure.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">National Asset Reconstruction Company (NARC) will acquire stressed assets in an aggregated manner from lenders. National Asset Management Company (NAMC) will act as a resolution manager for the acquired assets.<\/span><\/li>\n<\/ul>\n<h5><b>Benefits of Bad Bank<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Firstly, banks will get the recovered value of the stressed asset and their balance sheet will not appear stressful. This will improve their valuations.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Secondly, banks will get <\/span><b>more lending leverage<\/b><span style=\"font-weight: 400;\"> as:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Less provisioning is done for stressed assets if a robust bad bank exits\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Bad Banks generally pay 85% in sovereign receipts and remaining in cash. This can be used for giving more loans.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Thirdly, it will drive the consolidation of stressed assets and help in <\/span><b>faster decision-making.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Fourthly, banks will get <\/span><b>more management space<\/b><span style=\"font-weight: 400;\"> as recovery work will be undertaken by bad banks. This would allow them to focus more on credit growth.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Finally, as per some experts, transferring Rs. 400 assets to bad banks work out to around Rs 526 for the economy (a multiplier of around 1.3). <\/span><b>Further, benefits worth Rs 2.2 lakh<\/b><span style=\"font-weight: 400;\"> can be witnessed at just <\/span><b>a 20% recovery rate<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<h5><b>Way Ahead<\/b><span style=\"font-weight: 400;\">:<\/span><\/h5>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Banks have realized the growth potential of the sector. They are constantly developing new business models, rationalizing costs, and providing superior services to attract more customers.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Along with this, the focus should on creating a favorable environment for the development of.. that includes:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Keeping majority ownership in the private sector<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Putting together a strong and independent board<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Linking AMC compensation to their performance<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b>Source<\/b><span style=\"font-weight: 400;\">: <strong><a href=\"https:\/\/indianexpress.com\/article\/opinion\/columns\/npa-bad-loan-covid-pandemic-indian-banks-7240423\/\" target=\"_blank\" rel=\"noopener\">Indian Express<\/a><\/strong>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Synopsis: Indian banks have started to recover post the pandemic phase. Moreover, the banks will strengthen after the creation of a bad bank as promised in the budget. Background: During the pandemic, NPA(Non-Performing Assets) was expected to rise. Thus, Indian banks have written off their balance sheets. A write-off is an accounting term through which&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/bad-bank-for-strengthening-the-banking-sector\/\">Continue reading <span class=\"screen-reader-text\">Bad Bank for strengthening the banking sector<\/span><\/a><\/p>\n","protected":false},"author":10322,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[1278],"class_list":["post-97385","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-eco_4","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/97385","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\/10322"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=97385"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/97385\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=97385"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=97385"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=97385"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}