Bad bank means a financial institution that takes possession of bank’s debt accounts and resolves it.
Banks can transfer accounts of about 80 large NPAs, ie loans with stranded debt, to National Asset Reconstruction Company (NARCL). NARCL is expected to be operational by next month. NARCL is the name of ‘Bad Bank’ (Bad Bank), announced in the Budget of 2021-22. Bad bank means a financial institution that takes over and resolves the bank’s debt accounts.
Each of these NPA accounts is more than Rs 500-500 crore in size and banks have identified around 70-80 such accounts which will be transferred to the proposed Bad Bank. With this, the debt of more than 2 lakh crore rupees will be out of the books of the banks and will go to the bad bank.
Announcement was made in the budget
Finance Minister Nirmala Sitharaman had said in the budget of 2021-22 that public sector banks have to make more provisions in lieu of their trapped debt. To correct this, steps need to be taken to fix the books of the banks.
In his budget speech, he had said, Asset Reconstruction Company Limited and Asset Management Company will be formed to take out and dispose off the stressed assets.
According to the Finance Minister, after that the management and disposal of these assets will be done through Alternative Investment Fund and other potential investors. If the loss exceeds the prescribed limit, the government guarantee will be redeemed.
Fraud loan will not be sold to NARCL
The Reserve Bank of India (RBI) has clarified that loans which are in the fraudulent category will not be sold to NARCL. According to the RBI annual report, as of March 2020, loans worth Rs 1.9 lakh crore have been classified as fraudulent loans.
What will be the benefit
Due to selling NPA bad banks, the balance sheet of the banks will be cleared and it will be easy for them to distribute loans and do business afresh. If the balance sheet of the banks is clean, then it will be able to do business openly and will be able to distribute loans fast. The bad bank buys the NPA of the banks at a lower price. This will increase the liquidity with the banks.
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