Get Started. It's Free
or sign up with your email address

1. Why in news?

1.1. Budget Speech FM stated that the centre proposes to set up a Bad Bank

1.1.1. To acquire bad loans from the banks

2. What is it

2.1. Financially entity set up to buy Non performing assets or bad loans from banks

3. Aim to set up

3.1. Help ease the burden on banks by taking bad loans off their balance sheets

3.1.1. Which will allow them to lend again without constraints The bad bank will restructure or recover the loan rather than the bank from whom the loan was taken

4. Amount of bad loans in India

4.1. Acc to RBI

4.1.1. Rs 9 lac crores This is projected to go upwards because of the lockdown and the pandemic

5. Advantages of setting up a bad bank

5.1. Will consolidate all bad loans of banks under a single entity

5.1.1. Focussed only on recovering the loan

5.2. Similar experiments been done in

5.2.1. USA

5.2.2. Germany

5.2.3. Japan

5.3. Will free up capital for the banks which they have provisioned against these loans

6. Disadvantages of setting up a bad bank

6.1. Will only shift the problem of bad loans from one govt entity to another

6.1.1. From public sector banks to Bad banks both owned by GOI

6.2. Ownership problem not solved

6.2.1. PSB managed by bureaucrats while Private banks by individuals Bureaucrats have no incentive to earn profitability to the bank so they lend without checking the background of the borrower Reason of bad loan crisis the Private bank owner would want to lend to the right owner to drive profitability of the bank

6.3. Moral hazard

6.3.1. Banks bailed out by a bad bank will have little reason to mend their ways They will keep lending recklessly since their bad loans will be taken over by the bad bank Will worsen the loan crisis

6.4. banks will have to sell their bad loans at a discount

6.4.1. Thus loss for the bank