India to launch the concept of Bad Bank
The concept of Bad Bank gets the approval of the government of India. An initiative is taken by the government, under this initiative NARCL (National Asset Reconstruction Company) is formed. The major focus of the government behind launching this body is to recover the bad loans which have been collected at the banks.
Before moving ahead, It is crucial for us to first understand some terminologies of the Bad Bank
As we all know that people deposit their money in banks and banks give interest on that deposited amount. Likewise the other major role of a bank is to provide money to industries, businessmen, farmers and many other persons who are in need of money in the form of Loans.
The interest which banks charge on the loans is much higher than the interest which banks give to the people on depositing their money. This difference is the revenue of the banks.
Somehow, the loans which bank gives, cannot recover which is termed as Bad Loans. These bad loans are keep on increasing within banks. According to data , 2 lakh crore Bad debts have been stuck on banks.
To resolve this concerned issue the government of India had formed and also got the approval for the concept of Bad Banks. An organised body is formed to recover these bad loans which is named as Bad Bank.
Recently the Union Cabinet accredited the Rs 30,600 Crore guarantee to the bank safety Receipts by the aid of National Asset Reconstruction Company Limited ( NARCL ) for acquiring burdened loan assets. NARCL (National Asset Reconstruction Company Limited) is a part of a New Bad Bank structure that was introduced with the Budget 2021.
Structure of the Bad Bank
For resolving and recovering bad loans in the Indian banking sector, the government of India has set up two bodies to buy the stressed assets and then sell them in the market. These two entities are NARCL (National Asset Reconstruction Company limited ) and IDRCL (Indian Debt Resolution Company Limited ) OR In simple words we can say that Bad Bank is comprise of two bodies named (1) NRCL AND (2) IRCL
National Asset Resolution Company Limited(NARCL) has been incorporated under the companies act and has applied to the Reserve Bank Of India for a licence as an asset reconstruction company (AIC). 51 percent ownership is maintained by the Public sector banks (PSBs) in the NARCL.
When banks give loans, it also collects security from the public. NARCL (National Asset Reconstruction Company limited) buys these security deposits from the banks. 15% Amount of the total value of the security deposit is given cash in hand at the time of purchase by NARCL to the bank.
In other words, NARCL will acquire stressed assets worth about RS 2 Lakh Crore from various commercial banks in different phrases.
IDRCL (Indian Debt Reconstruction Company Limited) is another entity or a body which sell the stressed assets in the market. Financial Institutions (FIs) and Public Sector Banks (PSBs) will hold a maximum stake of 49 percent in IDRCL.
When NARCL (National Asset Reconstruction Company Limited) buy the security deposit from the banks afterward IDRCL sell these bought securities in the the market. Banks will get the rest amount of 85 percent after when IDRCL sold the security.
Global Perspective
Bad loans are nothing but non performing loans.India is right now at the third worst position. Our non performing loans to total loans from almost 7.9%, which is followed by Greece and Russia is almost the worst.
Our mission is 2 lakh crore. Once it got cleared and recovered, the problem would almost get solved. But will the problem really get solved ? No , it will not. Recently, RBI came up with a report where it had mentioned that on 31st March 2021 our bad loans are almost expected to be 8.35 lakh crores. Out of that the current focus is just on 2 lakh crore.
Now, is there any possibility that these 8.35 Lakh crore would also further increase then it’s absolutely true as whatever loans were given during covid period there is a great chance that there might be low recovery in this and because of which bad loans might increase further.
Let’s examine whether the concept of a world bank is tested by the other countries or are we the first country to have a Bad Bank. It has already been tested by other countries as well, including the USA, China, Sweden and a few other countries.
USA has introduced this concept of Bad Loan for the very first time. In India we have PSUs likewise that was Mellon Bank in USA and this happened in 1988. Mellon Bank had bad loans of worth 1.4 billion dollars and these bad loans were in the energy and real estate sector.
Grant Street National Bank was the Bad bank of USA which were going to look after the recovery of bad loans. Over a period of seven years (1988 – 1995) the stock of Mellon bank gave a return of 21.3 percent.
The Swedish banking crisis happened in 1992 because of a combination of over speculation in property assets and the exchange rate of the Swedish krona. In 1993 out of that three banks became insolvent and because of which the authority decided that they will establish two bad banks – Retriva and Securum. The value of these toxic assets was worth SEK 51 Billion.
Originally, these bad banks were given the time of 10-15 years but finally they wrapped it up in the time they had for just 5 years. So by the mid of 1997 almost 98 percent of assets were disposed of. This explains that the Swedish bad banking model is one of the good results and should be adopted internationally.
Criticism
The public sector banks might just go on the landing spray to those who don’t even deserve that loan. Second criticism which bad banks are facing is that the government is not doing this for free of cost.
The government is going to charge a fee for that. 0.25 percent of the amount of the SR. And in fact they are also going to an escalation clause of 0.25 percent every single year. These are some basic criticism for the concept of Bad Bank.
