A Poor Idea

Context: The recent push towards setting up of a Bad Bank may fall short of actually providing relief against the rising Non-Performing Assets (NPAs) (reaching 13.5% this year).

Problems associated with Bad Bank

• May delay resolution process: thereby worsen NPA problem.
• Does not solve fundamental problems: like poor lending standards of PSBs.
• Will face problems similar to those faced by PSBs: like the reluctance of bankers in the PSBs to recognize bad loans as they can be held against them by investigating agencies.
• Valuation of assets will remain contentious.
• Problems with officials:
  • Officials would not have a free hand to act professionally as resolution of bad debt would require significant write-offs.
  • Attracting the right talent to handle and resolve bad assets is a challenge.
• Would not reduce fiscal pressure: As writing down assets from the books of a bad bank would result in losses for the government and increase capital requirement.

Way Forward: to deal with NPAs.

• Wider reforms in PSBs to function freely and compete in the market.
• Strengthen the Insolvency and Bankruptcy Code (IBC): to avoid delays in the resolution of bad assets.
• Address real issues: rather than shifting the problem from one institution to another.