CASE STUDY

ANALYSIS
Bhakti Bhadra

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Bad Banks as a Solution to The Public Banking
Sector’s NPA Predicament: The Way Forward

A PANDEMIC-HIT ECONOMY HAS LED ARC AND AMC HAVE PREPARED THE IN THE 2021 BUDGET PRESENTATION
RISING NPA IN PUBLIC BANKING SECTOR COUNTRY FOR BAD BANKS THAT WOULD FINANCE MINISTER NIRMALA SITARAMAN
CONSIDERABLY LESSEN TOXIC ASSETS AND INTRODUCED FORMATION OF BAD BANKS
PROMOTE GROWTH TO RESOLVE NPA

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The Crisis: What is it?
◦ Loans or advances that are in default or arrears are known as nonperforming assets (NPAs).
◦ NPAs are often a hindrance to a financial institution’s ability to carry out its operations.

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The Solution: The “bad” strategy
◦ Bad Banks, also often referred to as an Asset Management Company is a type of corporate structure
that are created to purchase illiquid or high-risk assets, traditionally non-performing loans or assets
that are retained by any bank or other financial organizations.

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A model has been proposed by the Indian Banks
Association( IBA) for the bad banks to work in two tiers.
Level 1: Level 2:

• There will be an Asset Reconstruction Company • There will be an Asset Management Company
(ARC) upheld by the Government which would (AMC).
purchase awful advances from banks and issues
• AMC would be controlled by open and private
Security Receipts to the Banks.
bodies which incorporates banks too.
• According to RBI rules, ARC will hold Security
• Turnaround experts.
Receipts of 15%.
• Banks will get 15% of the money and will hold
85% of Security Receipts. Consequently, it is
called 15:85 construction.

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◦ While building a regulatory framework and structure for Bad Banks in India,
there are various International counterparts that India could take inspiration
from. One significant structure that boosted vitality in the domestic economy
is the German case. In the financial year of 2008-09, there was an impending The Future way
global financial crisis in Germany. While the crisis was mainly restricted to
the export and manufacturing structure, certain portions of the banking forward :
sector were also exposed.
A Structured Framework for
◦ A structured AMC and Bad Bank were significant in repairing the economy of Bad Banks in India: An
Germany
Inspiration from The German
◦ The German Government designed two structures of Bad Banks. one would Model.
serve the private sector and one would serve the public sector.
◦ The bonds of the Private Sector Banks were guaranteed by a Government
institution – SoFFin. The banks were charged an initial fee and an annual
sum in exchange for this guarantee.
◦ For the PSBs, a “Consolidation Model” was set up. “Under the said model the
public banks could transfer not just stressed assets but also another type of
assets including business divisions which has lost their profit-making ability”

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 CONCLUSION

• The creation of Bad Banks as a weapon against NPAs is a strategy that has been
continually brought forward in India. 
• The conducive environment along with the specialized expertise of resolving NPAs is the
strength of Bad Banks.
• Many countries across the world have intricate systems of Bad banks to deal with the
financial crisis of their domestic banking sectors.
• “Securum” was a bank that was set up in Germany in 1992 to take over and dissolve the
assets of a commercial bank. There are various other successful examples of Bad bank
models scattered across the world.

• The Indian Government must introduce a sound structure in order to ensure maximum efficiency.
The structure of the Bad bank would be reliant on the nature of the crisis in India.
• Also, for the creation of a bad bank structure, the government must play a regulatory role with
regulatory control.
• With the monetary involvement of specialized individuals and the Private Sector, the bad bank
strategy will be effective in controlling NPAs without hurting the taxpayers.
Thank you