Opinion on Idea of Bad Bank, and it’s benefit for Public Sector Banks – The Indian Banks’ Association, IBA has requested the Government to set up a ‘Bad Bank’ to reduce the impact of the losses banks will face because of higher provisioning for Non performing Assets, NPAs.
What is Bad Bank ?
It is an idea of new setup that moves the non performing, distressed and illiquid assets of a bank into another entity through regulatory structures such as asset reconstruction companies (ARCs), alternative investment funds (AIFs) and asset management companies (AMCs).
The IBA proposal envisages setting up an ARC platform to buy these stressed pools from banks and turn them around. This would allow banks to write off the appropriate provisions for the portfolio sold and get the discounted value that the ARC pays for the distressed pool purchase. The stressed assets can alternatively be sold to an AIF, which could turn them around.
Why is the idea of a new bad bank Good for PSBs?
The Public Sector Banks are reeling under high Non performing assets (NPAs). The major chunks of their profits are utilize in accommodating the higher provisioning. Bad bank would help them in transferring some of their chronic NPAs with improvement in the profits.