For ages, bad loan accounts are considered deteriorating for the overall health of financial institutions including banks. Though harder credit checks are being done to avoid bad debts, the banking sector is still facing an increase in the number of Non-Performing Assets (NPAs). NPAs are considered a technical term in terms of loans that are ceased to or have already evaded.
Keeping this increase in the number of NPAs, the government has decided to define a bad bank in India which may end up this problem for ever. If you want to know more about bad banks, keep reading below.
What does a bad bank mean and how it works?
The bad bank in India is usually known as National Asset Reconstruction Ltd (NARC). This NARC is expected to perform as an asset reconstruction company. It would be designed to buy bad loans from the banks, thus discharging them from the NPA. NARC will then try to sell the bad loans to the buyers of distraught loan. Distressed debt are usually bonds sourced from bankrupt firms. They may also emerge from companies that are on the edge of bankruptcy.
When it comes to selling the poor performing assets in the industry, the government has already established an India Debt Resolution Company Ltd (IDRCL), which is supposed to sell those assets in the market.
The respective bank or the financial institution, after the worried asset is traded, will get the cash for the same in parts. If the bad bank in India is not capable of selling the strained loan for a revenue or is unable to sell completely, the government guarantee will be appealed. It’s necessary to keep in mind that the government has discharged a guarantee worth Rs 36,000 crores for this objective.
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What is the need for bad banks in India?
In India, there are numerous loan accounts in the country that are unpaid as the borrowers are unable to repay the borrowed amount. A loan is largely measured as a bank’s plus as the paid by a borrower is a kind of income for the bank. Once a borrower confirms that she or he is unable to repay, that specific loan becomes a non-performing asset or NPA.
According to one of the top 10 stock brokers in India, public sector banks in India accumulated NPAs worth nearly Rs 6.17 lakh crores during the fiscal 2021-22. All the bad bank update entitlements that NARC is supposed to clean up the rising level of NPAs to the best level possible.
At various intervals, governments have attempted to reset banks with new capital nearly every year but the quantity of defaults and even top-level frauds are on the increase.
Are bad banks really effective? Do they help investors and depositors?
A bank carrying a lesser lead of non-performing assets simply means better operations for the bank, which in turn may help the investors, depositors and maybe even borrowers. But, at this point in time, it is difficult to confirm whether such a system will prove helpful in an extended time frame. Important elements to watch out for would be if these bad loans will get buyers. If the bad bank does not get a beneficial deal for a majority of bad loans, will the government ensure will do the justice. If the government increased the guarantee in the near future, what will be the source of funds? Therefore, once the process becomes operational, we will get more clearness on if the bad bank system is effective or not. However, the role of best broker for trading is also important.
The insinuations of bad bank are quite higher for banks and their shareholders instead of depositors – though a systemically good performing bank is in the favour of depositors. However, with respect to India, its financial institutions have always accomplished to safeguard the benefits of local shareholders over the past few years.