Indian Banks Association sends proposal to govt, RBI for setting up of 'Bad Bank'
Mumbai/IBNS: Indian Banks Association (IBA) has sent a proposal to set up a 'Bad Bank' to the Finance Ministry and the Reserve Bank of India (RBI), said a CNBC-TV18 report. A Bad Bank is named so as it houses all bad loans or non-performing assets.
The proposal was simultaneously copied to the Department of Economic Affairs(DEA) and the Department of Financial Services (DFS), the report added.
The role of DFS and DEA will be crucial along with RBI, as the banking regulator, an IBA official said, the report stated.
According to the proposal, Rs 70,000 - Rs 75,000 crore of bad loans at book value in the 'Bad Bank'.
An estimated Rs 10,000 crore of initial capital will be required to set up the 'Bad Bank', according to the IBA, which says the government should provide the required capital.
The IBA has proposed resolution in three stages, including an Asset Reconstruction Company (ARC), Asset Management Company (AMC), and finally the Alternate Investment Fund (AIF), the report said.
An Asset Reconstruction Company (ARC) is a specialized financial institution that purchases the NPAs or bad loans from banks and financial institutions so that they can clean up their balance sheets. In simple words, ARCs buy bad loans from banks.
The Asset Management Company proposed in the structure would be run by private and public bodies, including banks and turnaround professionals, said the report,
Further, the Alternate Investment Fund will help in trading the security receipts issued by the asset management company in the secondary market, the report added.
According to the report, bad loans from both private and public sector banks are proposed to be housed in the 'Bad Bank'.
What is a Bad Bank?
A Bad Bank "houses all bad loans or non-performing assets".
When a bank accumulates bad loans or non-performing assets (NPAs), investors and other parties see it as a sign of financial weakness.
High NPAs impair the bank's ability to lend, borrow and conduct business.
In this situation, a bank may segregate its good loans and NPAs, which it realises would not be easy to recover. It can then transfer it to a Bad Bank, set up to aid the recoveries of these risky assets or loans.
As of March 2020, the total gross NPAs in the Indian banking system are nearly Rs 10 lakh crore, as per multiple reports, the reports said.