Lending a hand

Context: While the Reserve Bank of India  (RBI’s) has indicated the creation of a Bad Bank to address stressed loans, it is also marred with certain issues.

Need for Bad Banks:

• Rising Non-Performing Assets (NPA): Financial Stability Report of RBI found that NPA could rise to 13.5 % of advances by September 2021, up from 7.5 % last year.
  • The Economic Survey 2016-17 had also argued favouring setting up a “Public Sector Asset Rehabilitation Agency” to help tackle the problem of bad loans.
• For reviving credit growth: Because a bad bank will leave the banks free to churn out loans.
• For a quick and effective restructuring of the loans: By aggregating loans of a stressed entity into a single entity.

Problems associated with Bad banks:

• No clear roadmap yet: E.g., there is no clarity on the kind of loan it will take over and the prices at which the loan will be transferred.
• Quality of credit may come down: Since the bad bank will free lenders from the outcome of their actions.
• Inherent problem of banking sector ignored: Bad Bank cannot address structural weaknesses in public sector banks and have no role in the recapitalization.

Conclusion: Along with a Bad Bank, larger systemic issues need to be attended for addressing the weaknesses in public sector banks.