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Bad Bank, Bad Loans and the Indian Banking Mess
This article looks into the reasons for the large non-performing assets of the Indian banks, particularly public sector banks, and the various steps taken by the government and the Reserve Bank of India to tackle the issue of bad debts. It also examines if a bad bank is the magic wand that can solve this problem.
This article looks into the reasons for the large non-performing assets of the Indian banks, particularly public sector banks, and the various steps taken by the government and the Reserve Bank of India to tackle the issue of bad debts. It also examines if a bad bank is the magic wand that can solve this problem.
On 1 February 2021, Finance Minister Nirmala Sitharaman in her budget speech announced the setting up of a bad bank to move the bad loans of the public sector banks (PSBs) to this bad bank and thereby clean up their balance sheets. The idea of a bad bank has been floating around for a few years now. Arvind Subramanian, the chief economic advisor to the ministry of finance between 2014 and 2018, had proposed it in the Economic Survey of 2015–16. The bad bank becomes particularly important in a scenario where the Reserve Bank of India (RBI) expects that by September 2021, the non-performing assets (NPAs) or bad loans of the PSBs under a severe stress scenario will touch an alarming 17.6%.
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