The general business model of any bank is to make profits out of accepting deposits and lending loans. Usually, the funds received in the form of deposits from the customers, is provided to borrowers in the form of loans. The interest chargeable on this loan is the profit margin to the banks.
But the interesting element is to make wise lending decisions by the managers who are often caught by strong pressures to disburse loans. Over a period of time, such loans turn out to become bad loans as the borrowers fail to repay the principal and interest amount of the loan. This ultimately results into large pool of NPA.
Banks are very prominent players in any economy and if all such banks are wrapped by NPA crisis, the stability of the economy will be a severe challenge. The balance sheet of the banks is stressed by huge load of NPA and distressing the balance sheet has become an important agenda of any banks.
Decoding ‘Bad Bank’ –
How does it look when all items in house are scattered across? What if you place all waste items in a store room? This is exactly what the finance ministry is attempting to revamp the banking system.
Bad bank is a corporate entity that is established to buy Non-Performing Assets of a bank at a price decided. After acquiring the bad debts, the stressed assets will be sold in the market by India Debt Resolution Company Ltd. The idea of Bad Bank is to clean up the balance sheet of the banks by transferring the stressed assets to the Bad Bank so that the stressed banks can overcome the crisis and can focus on the core banking activities.
How good is ‘Bad Bank’? – My Short Insights
It has become imperative for the banks to adopt robust system for recovering the bad loans and to fix this issue, Union Finance Minister proposed for setting up of Bad Bank and announced over 30’000 crores guarantee as part of resolution of bad loans.
# It will clean up the balance sheet of the banks
# It helps banks to focus on core business activities of the banks
# Assists in better assets management of the banks
# Banks will get bottom-line boost
# Depositors’ money is not used to re-capitalize the banks.
Will Bad Bank make bank good?
The objective of Bad Bank is to provide relief to the stressed bank and to make them focus on core business activities of the bank. It is quite evident that Bad Bank will not provide solution to the bad loans permanently but banks can experience the relief at the short run. The critical challenge for the ministry is to ensure that there should not arise any situation to bailout the Bad Bank. Another biggest challenge is transferring the assets (bad loans) from balance sheet of stressed bank to the balance sheet of another bank. Therefore, the ministry should critically create the structure of the Bad Bank and monitor on continual basis.