Nod For Establishment Of ‘Bad Bank’ To Settle Bad Loans Of Banks

New Delhi: With just a few days left for the Union Budget 2022-23 to be presented and Union Finance Minister Nirmala Sitharaman’s proposal to set up a ‘bad bank’ during the budget presented on February 1 last year has got the green signal.

State Bank of India chief Dinesh Khara said on January 28 that the proposed bad bank has now got all the necessary permissions including the ones from Reserve Bank of India. He told that this bank will start work from March 31 with 15 cases worth Rs 50,335 crore.

According to a report in the Indian Express, Khara said that the public sector banks will have a majority stake in the National Asset Reconstruction Company Limited (NARCL), while the private banks will be predominantly Indian Debt Resolution Company Limited (IDRCL).

On February 1 last year, Sitharaman in her budget speech had proposed a new framework for resolution of stressed assets, outlining measures to free the books of public sector banks from stressed assets.

Stressed assets are similar to non-performing assets (non-performing assets- NPAs), write off assets and restructured loans. That is, such debts which are not recoverable.

Khara said that some concerns were also raised regarding this, but now both NARCL and IDRCL have got the requisite approvals. He said that NARCL will take over the identified non-performing asset (NPA) accounts from banks and IDRCL will handle the debt resolution process.

Khara said that this is a structure that has been envisioned for the first time and the amount of time taken was necessary to address some of the issues that could possibly come up in future.

He told that all of them have been properly resolved. Therefore, now the functioning of both the institutions should be smooth and they should be in a position to achieve the purpose for which they have been brought into existence.

Explaining the working of two equal treatment bodies, NARCL and IDRCL, he said that NARCL will have the right to finalize the resolution.

As per the report, asset resolution will be done in a phased manner. A total of 38 accounts totaling Rs 82,845 crore have been identified for transfer to NARCL. In the first phase, at least 15 accounts worth Rs 50,335 crore will be transferred to the bad bank by March 31.

Initially there was a plan to transfer an estimated Rs 2 lakh crore of bad loans to bad banks. However, Khara said that some of these accounts have already been resolved.

Khara hoped that after the establishment of the bad bank, the resolution of assets would be done expeditiously.

Explaining the operational structure, Khara said that NARCL will buy bad loans of these banks in the ratio of 15:85, where it will pay 15 per cent in cash and issue Security Receipt (SR) for 85 per cent. The government will give a guarantee on the security receipt.

What Is Bad Bank?

The ‘Bad Bank’ is being formed to segregate the bad loans or bad loans of the banks. By doing this the bad loan is removed from the balance sheet of the concerned bank and the bad bank takes that bad loan with itself.

In other words, the bank will buy bad loans of banks cheaply and sell them at a better price. For example, suppose a bank has a bad loan of Rs 100 lying with it, the bad bank will buy it for Rs 70 and sell the same thing to another company for Rs 75.

For the last several years, dark clouds of bad loans are hovering over India’s banking system, due to which the economy remains sluggish.

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