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Bad Bank: A solution to India’s NPA problem or A preposterous idea? By: Ritwik Mahajan (IIM Visakhapatnam)
This year's budget was quite optimistic, given the fact that it touched all major pain points, especially the healthcare sector. Secondly, it was a sigh of relief for the financial sector, especially banks reeling under the pressure of low debt recovery and rising NPA (Non-Performing Asset) problem due to the overarching impact of demonetization and GST induced shocks in the market. This was further exacerbated by the exogenous shock of the Covid pandemic on an already slowing Indian Economy. The budget promised a capital Infusion of Rs. 20,000 Crores to restructure the bank debts, and a promise to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC). During the last month, the government promised ARC; the National Asset Reconstruction Company Limited (NARCL) got registered with an authorized capital of Rs. 100 Crores, sparking the unending debate on whether a Bad Bank is a good idea or not. Let us dig deeper into the past to get some clarity. The idea of a Bad Bank emerged in Asia after the aftermath of the Asian Financial Crisis of 1997, affecting the ASEAN countries and the EastAsia due to credit bubbles and fixed exchange rate regimes. Their Bad Bank model was quite successful and paved way for major financial reforms and economic growth in the region.
