Table of Contents
What has happened?
- Finance Minister Nirmala Sitharaman on Monday proposed setting up of an asset reconstruction company and an asset management company (AMC) to clean up non-performing assets in the banking sector.
- The new entities will help effectively deal with non-performing assets (NPAs) which may see a surge once regulatory forbearance to deal with the impact of COVID-19 is withdrawn.
what is a bad bank?
- A bad bank is termed so simply because it houses- Bad loans, or Non-performing assets (NPAs).
So, what does bad bank do?
- “An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and
- Then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization,” FM said.
Benefit to Bank X?
- A bad bank, therefore, is expected to help the banks by absorbing all their bad assets, usually at a price below the book value of these loans, and
- Manage them, in an attempt to finally recover the money over a period of time.
Who will set up this ARC?
- The Asset Reconstruction Company (ARC) proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the government.
- The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets,
- Will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large accounts.
Pros and cons
- Those in favour of the idea have argued that-
- Aside from cleaning up the banks’ balance sheets and making them financially healthy,
- It also allows the bank to focus on its core activity of lending, and leaves the resolution to experts.
- Former RBI Governor Raghuram Rajan was against the bad bank concept saying that-
- It created a moral hazard, enabling banks to continue with their reckless lending practices.
Q) Which among the following is not the function of General Insurance?
- Cattle Insurance
- Crop Insurance
- Fire Insurance
- Medical Insurance
Budget 2021 – 2022 | Free PDF