Deconstructing The Notion Of Bad Bank: Construing The Indian Perspective

Abstract

Banks and financial institutions play a significant role in accepting deposits from the public and lending loans. For banks, loans are assets since they generate periodic income in the form of interest payments from customers. When, however, such assets stop producing profit and earnings, it becomes non-performing assets (NPAs). As per the norms of the Reserve Bank of India (RBI), when an interest or principal payment is overdue for more than 90 days, it is usually referred to as NPAs. NPAs have always represented a significant concern in India. To deal with the growing menace of NPAs in India, various legislative and regulatory measures have been taken, including the establishment of Debt Recovery Tribunals, or the creation of Asset Reconstruction Companies (ARCs) etc. However, these measures did not succeed in resolving the issue of mounting number of NPAs. In order to address this problem, the Indian government established a bad bank which essentially is an Asset Reconstruction Company (ARC) known as the National Asset Reconstruction Company Limited (NARCL), the bad bank would purchase bad loans from the commercial banks at a discounted rate and will attempt to recover the debt from the defaulters by providing a systematic solution over a period of time. The unique feature of this bad bank is that a government-backed guarantee is provided, which may be used by NARCL to cover the difference between the face value of the security receipt and its actual value. In order to give an insight into the benefits and challenges associated with the creation of bad bank, this study attempts to analyse it from an Indian perspective with a view to generate a better understanding of its advantages and challenges.