Answer:

Non Performing Assets in Public Sector Banks is around 8 percent. The high NPA robs off the profit and thus dampens the credit growth. To solve this problem Bad Banks have been proposed. The NPAs will be transferred to Bad Banks. The bad bank will manage these NPAs in suitable ways — some may be liquidated, others may be restructured, etc. The idea of bad banks has following merits:

♤ Getting NPAs off the books will help the PSB management focus on new business instead of having to expend their energies on trying to effect recoveries.

♤ A bad bank will be better focussed on the task of recovery.

♤ If bad bank is a private entity, it can also bring in superior expertise. However, in Indian context, the bad banks may face the following challenges:

♤ If the government is the majority stake holder in the bad banks, it will be difficult for the government to find huge money. Considering the immediate recapitalization

demands that would arise, public debt levels would be impacted. Also, a government-owned bad bank appears to be transferring the problem from one part of the government to another.

♤ If a private player holds the majority stakes in bad banks, the pricing of bad loans will become a major issue. The high price will not be viable. For the low price, the bad bank will be accused of selling at low cost to boost the profit of the private player.

♤ Bad banks were typically intended for situations where projects were not viable. There is also a concern that bad banks may not be suitable for India wherein a big chunk of NPAs at PSBs pertains to projects that are viable. These projects have not gone through to completion for reasons that are mostly extraneous to the project, such as problems in land acquisition or environmental clearance.

Therefore, bad banks is also associated with challenges and may not be able to solve the NPA crisis alone. The most efficient approach would be to design bad bank solutions tailor-made for India’s bad loan problem.

♤ It should be based on a criterion as any such exercise creates a moral hazard which should be eschewed.

♤ There have to be strict performance criteria for the banks selling such assets. This can be through a multi-stage approach where these assets are bought piecemeal by the bad bank based on how future incremental assets perform.

♤ A competitive approach should prevail among the banks so that they work hard to qualify for the sale of bad assets to the bad bank.