Saturday, November 26, 2022

What is a bad bank?

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*A bad bank is a financial entity set up to acquire NPAs from banks and resolve them

* It is an Asset Reconstruction Company (ARC).

*ARC or a bad bank buys bad loans from commercial banks at a discount and tries to recover the money from the defaulter by providing a systematic solution over a period of time.

*It will manage these NPAs in suitable ways, some may be liquidated, others may be restructured, etc.

*The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints.

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*The bank, which sells the stressed assets to the bad bank, is now relieved of the burden of the bad loans and can focus on growing its business by advancing fresh loans to borrowers.

*The cleaner balance sheet also makes it relatively easier for the lender to raise fresh capital, if required.

Read the related article: The Good, the Bad and the Ugly

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