BAD BANK

A bank created specially to buy the bad debts (called ‘non-performing assets’ in India) of the existing banks to clear such loans of the latter. This way the banks with NPAs clear their ‘balance sheet’ and again start lending to the customers. The bad bank now tries to recover the bad debts it has bought

through available legal means. Though such banks were set up in 20th century itself in the USA, it came in recent use once the US central banks’ chief (Ben Bernanke) proposed the idea of using a government-run bad bank to clean up the ‘sub-prime’ loans of the private banks in the country (in wake of the sub-prime crisis of 2007).

It made news in India once the Economic Survey 2016-17 suggested the Government of India to set such a body— public sector asset rehabilitation agency (PARA)—to solve the ‘twin balance sheet’ (TBS) problem the country is faced with. At one hand the public sector banks are faced with high NPAs while on the other the corporate sector (who are the borrowers of these banks) of the country is also hit with negative balance sheet (unable to service or clear the loans due on them). The PARA is supposed to clear the balance sheets of both banks as well the corporate sector. The Survey has quoted the South East Asian economies where such agencies were used very effectively during the currency crises of 1996-97. By March 2017, it looked that the Government was prepared to set up such an agency (bank).