According to the Economic Affairs Secretary Tarun Bajaj, the Union Government is exploring all options, including setting up of a bad bank, to improve the health of the country’s banking sector.
What is a Bad Bank?
- In May 2020, the banking sector led by the Indian Banks Association (IBA) had submitted a proposal for setting up a bad bank to the finance ministry and the RBI, proposing equity contribution from the government and the banks.
- The report was based on an idea proposed by a panel on faster resolution of stressed assets in public sector banks headed by former PNB Chairman Sunil Mehta which had proposed an asset management company (AMC), ‘Sashakt India Asset Management’, for resolving large bad loans.
- A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions.
Logic against the Bad Bank proposal
- There is not one view on setting up a bad bank. In June 2020, Chief Economic Adviser K. V. Subramanian had said that setting up of a bad bank may not be a potent option to address the NPA woes in the sector.
- RBI’s former governor Raghuram Rajan has argued that a government-funded bad bank would just shift loans “from one government pocket to another and did not see how it would improve matters”.
- Some argue that when there are no takers for bad assets, so why have a bad bank.
(Indian Express)
