Coronavirus crisis: All that's bad about a 'Bad Bank'
The creation of a bad bank in its present format can only provide a temporary reprieve, by enabling transfer of a large chunk of NPAs, to make the banks' balance sheet look better
- May 25, 2020,
- Updated May 25, 2020 2:26 PM IST
In the last few weeks, there has been a buzz around the creation of a bad bank. It is touted as a panacea for growing non-performing assets (NPAs) in the financial sector. Bad bank as a concept has worked in some countries. But the proposed bad bank in its current structure could at best be a quarantine centre. It is neither the vaccine nor the ventilator for NPAs.
Each new idea raises some dreams. To illustrate, the Insolvency and Bankruptcy Code (IBC) is a testimony. It was a milestone event, enthused the financial markets like nothing seen before, helped improve India's ranking in ease of doing business, changed DNA of borrowers towards lenders, and redefined banker-borrower equation.
IBC is also credited with many high-profile successes. However, with lack of investor interest and four out of five IBC accounts heading for liquidation, the process has led to massive value destruction. Reference to IBC is suspended for one year in view of the current coronavirus pandemic.
The idea of a bad bank in India first appeared in the government's official document--The Economic Survey of 2016-17. It examined the problem of Public Sector Banks' NPAs, the options available with them for resolution, their limitations and suggested creation of Public Sector Rehabilitation Agency (PARA) - the genesis of discussion around 'bad bank' in recent years.
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In the last few weeks, there has been a buzz around the creation of a bad bank. It is touted as a panacea for growing non-performing assets (NPAs) in the financial sector. Bad bank as a concept has worked in some countries. But the proposed bad bank in its current structure could at best be a quarantine centre. It is neither the vaccine nor the ventilator for NPAs.
Each new idea raises some dreams. To illustrate, the Insolvency and Bankruptcy Code (IBC) is a testimony. It was a milestone event, enthused the financial markets like nothing seen before, helped improve India's ranking in ease of doing business, changed DNA of borrowers towards lenders, and redefined banker-borrower equation.
IBC is also credited with many high-profile successes. However, with lack of investor interest and four out of five IBC accounts heading for liquidation, the process has led to massive value destruction. Reference to IBC is suspended for one year in view of the current coronavirus pandemic.
The idea of a bad bank in India first appeared in the government's official document--The Economic Survey of 2016-17. It examined the problem of Public Sector Banks' NPAs, the options available with them for resolution, their limitations and suggested creation of Public Sector Rehabilitation Agency (PARA) - the genesis of discussion around 'bad bank' in recent years.
Also Read: