Concept of Bad Bank as Proposed in the Budget

Finance Minister in her Budget speech revived the idea of a ‘bad bank’ by stating that the Centre proposes to set up an asset reconstruction company to acquire bad loans from banks.

What is a ‘bad bank’?

A bad bank is a financial entity set up to buy non-performing assets (NPAs), or bad loans, from banks.
The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and getting them to lend again to customers without constraints.
The idea of a bad bank has been tried out in countries such as the United States, Germany, Japan and others in the past.
The total size of bad loans decreased to 9 lakh crore as of March 31, 2020, down significantly from over 10 lakh crore two years ago.
But experts point out that it is mostly due to larger write-offs rather than improved recovery of bad loans.
Due to the lockdown imposed last year, the proportion of banks’ gross non-performing assets is expected to rise sharply.

Source: TH

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