BAD BANK

(New strategy for NPA Management)

- Pravindra Kumar

Bad bank conveys the impression that it will function as a Bank but has bad assets to start with. Technically, a Bad Bank is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial Banks, manages them, and finally recovers the money over a period of time. The Bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.

The takeover of bad loans is normally below the book value of the loan and the Bad bank tries to recover as much as possible subsequently. Banks drive the nation's economy; however many times the borrowers find it difficult to service their loans. It requires the lenders to set aside the capital to cover the losses. When the Bad bank comes into the picture to help them free up to start lending.

Significance of Bad Bank

• Bad Bank will seek to provide financial stability in the banking sector. It will hold problem loans for public sector banks which can then be sold on to investors at a reduced price.

• The Bad Bank does not involve itself in lending and taking deposits, but it helps to make commercial banks clear their balance sheets and resolve bad loans.

• The process of taking over bad loans is generally below the book value of the loan

• Bad Bank tries to recover as much as possible from those bad loans

• Mellon Bank based in the USA was the first one in this field. It is referred to as the first Bad Bank in 1988.