Bad Bank: A Panacea for NPAs?

Bad Bank: A Panacea for NPAs?

#SSC-CGL2018 #SSC-CHSL2018 #IB #SBI-PO  (250 words)Important Topics for SSC, IB, BANK

Bad Bank was originally conceptualised to quarantine nonperforming high-risk assets from the balance-sheet of the original bank to a separate entity so that banks can reassert its claim over the credit growth of market without risking its business. Usually criticised for leading to moral hazard, this idea found its support in many countries during the period of recession in 2008.

In India, it was mooted around 2006 by economic survey report of 2016-'17. The focus was to jerk off nonperforming assets to an autonomous entity backed by Government and RBI. The rising NPAs and negative credit growth have put the government in a situation where this is seen as the last resort. The whole point of having a bad bank is to discover and recover the steady-state of economic assets and giving banks a chance to re-engage in market capitalisation by avoiding bad assets. PSUs which own around ninety per cent of this nonperforming assets are the one worst hit. 

But setting up a Bad Bank is a complex job which has to be equipped with IT, regulatory board and transferring nonperforming assets at market price is always risky job as banks may still be losers. Considering that in 'Sareb', the Spanish Bad Bank, where original investors are losing their initial investment, the idea of recapitalisation of banks on taxpayers money can actually force exchequer $ 32 billion. 

It is not a silver bullet to solve all problems of Indian banking sector but can be proved effective in the current situation.