What is bad bank and why India needs bad bank?

  • Bad bank is new type of bank, set up especially to identify, examine and sell stressed assets of poor performing bank and at the time of economic expansion when assets price is picked up , sell these stressed assets at higher prices. Through this, recovery on bad loans can be maximised.

The Swedish model“bad bank”

  • In1990s, financial crisis hits Sweden, it was very difficult time for Sweden as banks were suffered huge losses. So, to overcome from this problem, Swedish government started bad bank known as “Securum” which took over the stressed assets of another bank in order to stabilize banking system and economy during the distress. It was not done for owner or manager but for creditors and it was fully owned by the government. The life span of “Securum” was 15 years.
  • Swedish model for bank resolution is perfect guiding principle for other country to overcome from financial distress.

Necessary for India

  • In India, this year (2018), Public sector bank (PSBs) managed extremely small 3.1% growth in their aggregate deposit base. On other hand, Private bank saw growth of 17.4% in their deposit base and Regional rural bank (RRB) managed a 7.2% growth.
  • On a similar line, the government of India, too can create “bad bank” with full government ownership. Because in India, Public sector bank (PSBs) are largely affected by Non performing assets (NPAs), but to overcome from this problem it is necessary for our country to create state owned “Assets reconstruction company” (ARC) or “bad bank”. Then “bad bank” will also boost confidence in bank by maximising the recovery of bad loans, which is necessary for growth of bank.

 

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