Will ‘Bad Bank' Craft Good Banks?

Finance Minister, Nirmala Sitharaman has, at last acted upon one of her many announcements during the 2021 Budget presentation, by declaring the creation of India’s first-ever ‘Bad Bank. It will acquire all the NPAs of a bank at a price that is below their book price. It then will work to recuperate and turn around the assets by way of expert management, sale, or restructuring. How effective would be bad bank to solve the mega problem of NPAs? Shivanand Pandit answers this big question.

- Shivanand Pandit

Moving forward with one of her main statements made during the 2021 Budget presentation, the Finance Minister, Nirmala Sitharaman has declared the creation of India’s first-ever ‘Bad Bank.’ She said the National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act and it will procure strained assets worth approximately Rs.2 lakh crore from different commercial banks in various stages. India Debt Resolution Company Limited (IDRCL), another establishment that has also been founded will attempt to dispose of the strained assets in the market. The NARCL-IDRCL configuration is the novel bad bank and to make it a reality the government has allowed the utilization of Rs 30,600 crore to be employed as a guarantee.

Many banks had experienced a progressive increase in their loans’ portfolio since the international financial disaster of 2008-2009. In India, since 2016, the level of non-performing assets (NPAs) or bad loans has climbed terrifyingly. Largely this was because the Reserve Bank of India wanting banks to precisely identify the bad loans and record them in their books of accounts. Total NPAs of Indian public sector banks stood at Rs.6.17 trillion in the financial year 2020-2021. Thus, there is now no probability of receiving payment of that amount and banks must make provision for the sick days ahead.