Union Budget 2021 (What Is Asset Reconstruction Company Or Bad Bank) – Free PDF Download

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non-performing assets (NPAs) which may see a surge once regulatory forbearance to deal with the impact of COVID-19 is withdrawn.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?

1. 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?

1. Cattle Insurance
2. Crop Insurance
3. Fire Insurance
4. Medical Insurance

Budget 2021 – 2022 | Free PDF

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