Before we delve into the current story, let us look at what exactly are bad debts and what are bad banks. When the borrowers of a bank start defaulting on their payments recurrently, the loans are categorized as ‘bad debts’. And when these bad debts spike beyond manageable limits, a separate bank might have to be created to look after them collectively. That new bank is called a bad bank.
In recent times the problem of Non-Performing Assets has been troubling Indian Banking Sector for a long time now. And for solving the same problems last year during the budget session the Union Finance Minister had announced the creation of Bad Bank.
Bad Bank in India will be up and running by March 31
With Union Budget 2022-23 about to be announced, Finance Minister Nirmala Sitharaman has cleared a proposal to set up a ‘bad bank’.
The proposed ‘bad bank’ has “now” received all necessary permissions including from the Reserve Bank of India. It is ready to commence operations with 15 cases worth Rs 50,335 crore to be transferred by March 31.
Notably, public sector banks will have a majority stake in the National Asset Reconstruction Company Limited (NARCL) while private banks will majorly own the India Debt Resolution Company Limited (IDRCL).
NARCL will acquire and aggregate the identified NPA accounts from Banks while IDRCL under an exclusive arrangement will handle the debt resolution process.
15 Accounts worth Rs. 50000 crore will be transferred to the proposed Bad Bank
It should be noted that the asset resolution will be done in a phased manner. A total of 38 accounts worth Rs 82,845 crore have been identified for transfer to NARCL. In the initial phase, at least 15 accounts worth Rs 50,335 crore will be transferred to the proposed bad bank by March 31.
According to the initial plan, an estimated Rs 2 lakh crore worth of bad assets was planned to be transferred to the ‘bad bank’. But some of these accounts have already been resolved.
NARCL will purchase these bad loans through a 15:85 structure, where it will pay 15 percent of the sale consideration in cash and issue security receipts (SRs) for the remaining 85 percent. The SRs will be guaranteed by the government.
Will this Bad Bank be able to alleviate the woos of the Indian Banking sector, only time will tell.
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