Bad Bank in India: Opportunities and Challenges

1. Concept of Bad Bank in India: A
road ahead
Surya Kanta Mohanty
Research Scholar

2. Outline of Presentation
• Concept of Bad Bank
• Need of Bad bank
• NPA and its causes
• Structure and operation of bad bank
• Opportunities and Challenges
• Impact of Covid-19 on Bad bank
• Bad bank: a global perspective
• Conclusion.
• Is it a good idea or Bad idea???

5. • A bad bank is an ARC or an AMC that takes
over the bad loans of commercial banks,
manages them, eventually recovers the
money over a period of time.
• The bad bank is not involved in lending and
taking deposits, but helps commercial banks
to clean their balance sheets and resolve bad
loans.
• The takeover of bad loans is generally below
the book value of loan and AMC tries to
recover the bad loans the maximum amount
as possible subsequently.

7. NEED OF Bad bank

11. Need of Bad Bank
• Economic recovery
• Government support
• Rising NPA
• Better solution for NPA management

12. NPA
• Non Performing Asset means a loan or an
account of borrower, which has been
classified by a bank or financial institution as
sub-standard, doubtful assets or loss assets, in
accordance with directions or guidelines
relating to asset classification issued by RBI

13. Categories of NPA
There are different types of non-performing assets
depending on how long they remain in the NPA category.
a) Sub-Standard Assets
An asset is classified as a sub-standard asset if it remains
as an NPA for a period less than or equal to 12 months.
b) Doubtful Assets
An asset is classified as a doubtful asset if it
remained as an NPA for more than 12 months.
c) Loss Assets
An asset is considered as a loss asset when it is
“uncollectible” or has such little value that its
continuance as a bankable asset is not suggested.
However, there may be some recovery value left in it as
the asset has not been written off wholly or in parts.

17. REASONS OF NPA
• Lack of proper pre-enquiry by bank.
• Use of loan for other than sanctioned
purpose.
• Wilful defaulter
• Huge PML
• Government interventions

18. IMPACT OF COVID-19 ON NPA
• Banks bad loans expected to rise 9.6%-9.7% by
31st march 2021.
• Bad loans expected to rise 9.9-10.2% by 31st
march 2022.

19. STRUCTURE OF BAD BANK
The bad bank has a two-tiered structure,
• Tier 1: There must be an Asset Reconstruction
Company (ARC) by the government of India to buy
the toxic assets or bad loans from regular banks and
issue them security receipts. As per the Reserve Bank
of India guidelines, Asset Reconstruction Company
(ARC) will hold security receipts of 15 percent. Bank
will get 85 percent of security receipts to hold and 15
percent of the cash.
• Tier 2 : There must be an Asset Management
Company (AMC). Asset Management Company (AMC)
must be managed and functioned by public bodies as
well as private bodies which include banks too.

20. Operation of Bad Bank
HOW?????

21. OPPORTUNITIES OF BAD BANK IN
INDIA
• Government support.
• Expertise in debt collection.
• Future perspective
• An efficient tool for NPA management.

22. ADVANTAGES OF BAD BANK
1. Regular banks can focus on the core operations that last longer
duration once the non-performing assets are transferred to bad
banks.
2. Once non-performing assets are transferred from regular banks to
bad banks, this leads to a positive impact on the external users.
3. This process leads to an increase in the growth of profits and
decrease the pressure on the capital of regular banks.
4. Bad banks hold special authorities like speeding up of loan
recovery and disposal of non-performing assets.
5. When the non-performing assets of regular banks are removed
from its balance sheet and transferred to a new enterprise or bad
banks, then the regular banks‟ performing assets hold less risk
when compared to before.

23. CHALLENGES FOR BAD BANK
• 8.35 lakh crores of bad loans as on 31.3.2021
excluding private sector banks.
• Current focus is 2lakh crore
• Valuation of bad loans
• Selling of stressed assets to potential buyers
• Nationalised bank may go for more loans
• Govt. is not doing it free of cost, charge- 0.25% of
SR from banks.
• Problem in collection of bad loans.
• Covid-19 pandemic

24. Find India’s position!!!

25. BAD BANK: GLOBAL PERSPECTIVE
• USA (Successful)
Mellon Bank huge npa(1988)
1.4 billion dollar bad loans(Real estate and
Energy sector)
Grant Street National Bank(Bad Bank)
Existence (1988-1995)-7 years
Return rate of mellon bank – 21.3%(1988-
1995)

26. • Sweden(Successful)
Swedish Banking Crisis1992
Over speculation in property assets and exchange
rate crisis- swedish crona
Bad banks - Retriva and Securum
Three out of 4 major banks were insolvent
value of bad loans- 51 billion SEK
Estimated life span (10-15) years for bad loans at
the time of establishment vs actual life span of
only 5 years
By mid 1997, 98% of its assets were disposed off.

27. • China(Unsuccessful)
 A bad bank mess
 1999- A mountain of bad debt due to Asian currency crisis.
 Bad assets worth 62.45 billion dollar
 China Huarong Asset Management Company Limited(CHAMCL)
 Estimated life span of 10 years vs Actual life span extended
indefinitely
 AMCL transformed to an investment banker such as Real estate,
Securities broking, Insurance, high yeild cross boarder lending etc.
 Listed in Huarong stock exchange
 In October 2015, the company went public.
 In FY 15 to 16- 16.95 billion yuan profit, 2017 to 18 – 21.99 billion
yuan profit and in 2020 to 2021- 102.9 billion yuan loss.
 Chinese Govt. gave a bailout(capital injection)- 50 billion yuan in
2021.
 Italy also suffered like china
 USA, Sweden, japan Portugal, Indonesia, Germany, Austria etc–
Successful Bad Bank

28. Conclusion
• The resolution of bad loans in 5 years will be a
big challenge. The private ARCs have been
struggling to resolve the issues as there has
been lack of interest among buyers. To face
these challenges is a great challenge for Bad
Bank. Still, as many countries are already
successful , I expect in India, it will be
successful.

29. Do you have any question?

30. THANK YOU

31. Reference
• Times of India page, web news, What is good about a ‘bad
bank’
• Are bad banks effective options to tackle non-performing
assets?, by
deloitte.https://www2.deloitte.com/in/en/pages/tax/articles
/are-bad-banks-effective.html
• The endgame: On the new 'bad bank‘, The Hindu news paper.
• Bad bank article: revival mechanism of banking industry
• Wikipedia
• Indian express web news
• Slideshare
• https://www.investopedia.com/terms/badbank.asp