What is a Bad Bank and How it solves the problem of delinquency

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(Edited)

A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution. The entity holding significant nonperforming assets will sell these holdings to the bad bank at market price.
History of Bad Bank
US-based Mellon Bank created the first bad bank in 1988, after which the concept has been implemented in other countries including Sweden, Finland, France and Germany.
India witnessed the biggest financial event of the year on 1st February. Finance Minister presented the financial budgets in India which cheered up its stock markets. India's finance minister announced setting up of the bad bank, which gave a major boost to India's finance sector.

How will the bad bank function ?
An Asset Reconstruction Company and Asset Management Company are expected to be set up to consolidate and take over the existing stressed debt. It will then manage and dispose of the assets to Alternate Investment Funds.

In other words, it will hold problem loans for public sector banks which can then be sold on to investors at a reduced price. This will ultimately help clean up the balance sheets of banks.

The new framework will help clean up the balance sheets of public sector banks and make future requirements of capital less onerous.bad.jpg

The real question however is how will this bank get the money to buy the loans at the market prices. There are many other questions associated with this development.

  • Are there any other countries where these type of banks have succeeded ?
  • Will this mean that every bank will have zero bad loans?
  • Will this bank be owned by the existing banks itself ?
  • What would be the source of income for this bank if they invest in only bad loans ?
  • Will the bank take over all the bad loans from the banking system ?
  • What if there are no chances of revival of the account ?
  • Is Indian Government going to own this new bank ?
  • Where from the huge sum of say 2.25 lac crores would come from ?
  • Will the honest tax payer be paying the bills of these bad bankers ?

Posted Using LeoFinance Beta



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