What is a bad bank and how can it fix India’s bad loans problem?
AdvertisementThe concept of a “bad bank” has recently come to the fore again, following a decision from India’s Ministry of Finance to establishing a committee to assess the feasibility of such a vehicle as a way to solve India’s bad loan problem.
No, it’s not a bank that is evil.
A prominent example of a bad bank in recent history is Portugal’s Novo Banco. Novo Banco was established by the Portuguese government in August 2014, as part of a rescue of the failing Banco Espirito Santo (BES), which was the second-largest private bank in Portugal at the time. BES was split into a “good bank”, comprising all its healthy assets, and a bad bank (Novo Banco), which took up all of the risky and unrecoverable loans.
A bad bank frees other banks from recovering their bad loans themselves. It exclusively focuses on the restructuring and
The idea of a bad bank, or 'Public Asset Rehabilitation Agency' (PARA), was mooted in last year’s Economic Survey. While a bad bank is technically different from an asset reconstruction company (ARC), the two are, for the purpose of this undertaking, interchangeable in the eyes of the Indian government.
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