BAD BANK AND NPAs

 Bad Bank is defined as an asset management or reconstruction company that takes over the bad loans of commercial banks,manages them and finally recovers the money over a period of time.Bad bank is not involved in lending and taking deposits but helps commercial banks to clean up their balance sheet and resolve bad loans.

  Non Performing assets (NPAs) or bad loans of commercial banks have been shooting up unabated and in the past Various methods were adopted to tackle the problem.First we had the lok Adalats, followed by debt recovery tribunal and then Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFASI)Act which is supposed to give creditors much more power to be able to recover debts.Of late the Insolvency and Bankruptcy Code IBC was expected to allow quick resolution and high recovery.But gradually afterwards  under this mechanism the rate of recovery began to decline quite sharply.

  NPAs of Scheduled commercial banks in india which were rupees 8.96 lakh crores on their balance sheet on March 2020 declined by rupees 61180 crores to rupees 8.34 lakh crores at the end of March 2021 as a result of Government strategy of recognition resolution and reforms.A lions share of NPAs is with Government owned public sector banks.Gross NPAs of public sector banks (PSB) peaked at rupees 895601crores in March 2018, after government strategy of recognition resolution recapitalisation and reform NPAs declined to 739541crorers in March 2019,to 5678317crores in March 2020 and rupees 616616 crores as on March 31st 2021(provisional data).It may be noted here that Government has been infusing fresh capital to PSBs and rupees 131894 crores were written off in financial year 2020-2021itself.

In this scenario recently Government of India started National Asset Reconstruction company limited(NARCL) under the Companies Act as the part of a new Bad Bank structure, other being India Debt Resolution Company limited (IDRCL).NARCL will acquire stressed assets worth about 2lakh crores from various commercial banks in different phases.Public sector banks will maintain 51% ownership of NARCL and IDRCL will try to sell stressed assets in the market.NARCL after purchasing bad loans from banks will pay 15% of the agreed price in cash and the remaining 85% will be in the form of Security receipts. When the assets are disposed with the help of IDRCL the commercial banks will be paid back the rest. If the Bad Bank is not able to sell the bad loan or has to sell it at a loss, then the Government guarantee will be revoked. The difference between what the commercial bank was to raise will be paid from ₹30,600 crores that have been provided. This guarantee is extended for a period of five years. 

  In contrast to the 1980s and 1990s major share of defaulters now belonged to the corporate sector. The track record of earlier bad debt resolution mechanism were generally far below expectations,despite some meaningful resolutions made by Insolvency and Bankruptcy Code IBC. Setting up of Bad Bank will help to reduce high NPAs by getting rid of toxic assets. When recovery money is paid it will improve banks position to lend further. If political and bureaucratic bankruptcy continue to exist there in the management of public sector banks resulting in professional deficit it will increase subsequent absence of prudential norms.This requires much attention especially in the context of heavy investment expected for National Asset Monetization and National Infrastructure Pipe line programmes.On the whole the success of Bad Bank depends on tackling the underlying issues in the banking sector and reforming accordingly.