The problem of NPA is the banking sector has reached a stage from where it is necessary to take some tough calls on the part of the government as well as the RBI. The NPA level of PSBs which account for nearly 70 percent of the total banking sector stands at over 12 percent whereas for some of them it is higher at 15.88 percent. It is in this perspective that the concept of bad bank was introduced by RBI for public opinion and discussion.
Bad Banks: Understanding the basic concept
In order to take care of the spiraling NPA levels in banks, the solution has been muted as the implementation of Bad Bank Model. It is very simple as a concept. A bank divides its assets into good and bad. Good assets or performing assets are those which continue earning whereas bad assets are not able to generate any income. Segregation of these two is very necessary since bad assets can contaminate the good assets. This also helps in the alleviation of uncertainty hovering over the financial strength of an organisation regarding bad assets in the minds of the investors and helping the bank extend more credit to the society in the future. In the context of Basel III capital requirements, it helps in raising capital from the market as well.
So, What is a bad bank? Understanding the Model
Though the idea of the bad bank has been mooted already, there has not been any meaningful and fruitful discussion regarding the structure and operation of the bank. Now, what are models available for consideration in the case of starting a bad bank in India? According to a research paper by Mckinsey and Co. the same can be decided based on two factors:
Depending on these factors, there are four models available:
The concept of the bad bank has been there for long but in a case of India, setting up of a bank is not going to solve all the problems. It is not a panacea for each and every issue. The approach should be sector specific apart from the fact that political interference should be withdrawn from the decision-making process of the banks. The idea is still hanging fire and the RBI, as well as the government, does not look very eager to implement it anytime soon. The banking sector needs systematic revamp and not a top-down approach such as a bad bank.