The idea of bad bank is back. The banking industry lobby, the Indian Banks Association (IBA), has reportedly taken up this idea with the government. The IBA is considering an ARC-AMC model to create a bad bank and segregate all bad assets from PSBs and private banks into a separate entity. The idea is that this exercise will clean up bank balance sheets and they can focus on fresh lending.
A bad bank is essentially an entity which bundles together all the bad assets in the banking industry, buys it at a discounted price from banks and tries to find buyers by putting a turnaround plan in place. The purpose of creation of a bad bank is not very different from a typical ARC (Asset Reconstruction Company).
According to senior bankers and industry officials, there is no clarity on the final contours of the proposed bad bank and, the capital structure. The plan appears to be that the government will contribute initial capital to make the structure work and later banks will pool in money along with outside investors, which may include private funds with specialisation in asset resolution.
The idea is not new. In 2018, the government had announced a plan for PSBs called 'Project Sashakt', which had a five-point plan for bad loan resolution in public sector banks. The government then spoke of a model, with the guiding principles of an Asset Management Company resolution approach, under which an independent AMC would be set up to focus on asset turnaround, job creation and protection. The functions of this new company will be aligned with Insolvency and Bankruptcy Code (IBC) process and IBC laws, the government had said.