What are Bad Banks and How they work.
                     What are Bad Banks and 
How they work?
What is a bad bank?
• A bad bank is a bank set up to buy the bad 
loans and other illiquid holdings of another 
financial institution. 
• The entity holding significant nonperforming 
assets will sell these holdings to the bad bank 
at market price. 
Source: www.investopedia.com
Understanding Bad Banks
• Bad banks are typically set up in times of 
crisis when long-standing financial institutions 
are trying to recuperate their reputations and 
wallets.
Source: www.investopedia.com
Proposal for setting up a bad bank 
• The banking sector, led by the Indian Banks 
Association (IBA), had in May submitted a 
proposal for setting up a bad bank to the 
finance ministry and the RBI, proposing equity 
contribution from the government and the 
banks.
Source: www. indianexpress.com
Faster resolution of stressed assets 
• This was based on an idea proposed by a 
panel on faster resolution of stressed assets in 
public sector banks headed by former PNB 
Chairman Sunil Mehta. 
• This panel had proposed an asset 
management company (AMC), ‘Sashakt India 
Asset Management’, for resolving large bad 
loans two years ago.
Source: www. indianexpress.com
What kind of NPA spike 
is expected down the 
line?
• The rating agency said in a scenario wherein 
funding markets continue to exhibit 
heightened risk aversion, corporate stress 
could increase further by Rs 1.68 lakh crore in 
FY21-FY22. 
• Consequently, 20.84 per cent of the 
outstanding debt could be under stress in the 
agency’s stress case scenario.
Source: www. indianexpress.com
What is the 
government’s view?
• The government’s view is that bad loan 
resolution should happen in a market-led way, 
as there are many asset reconstruction 
companies already operating in the private 
space.
Source: www. indianexpress.com
What is the officials 
view?
• While the finance ministry has not formally 
submitted its view on the proposal, senior 
officials have indicated that it is not keen to 
infuse equity capital into a bad bank. 
Source: www. indianexpress.com
Capitalised state-owned 
banks 
• The government has significantly capitalised 
state-owned banks in recent years and 
pursued consolidation in the PSU banking 
space. 
• In the last three financial years, the 
government has infused equity of Rs 2.65 lakh 
crore into state-owned banks. 
Source: www. indianexpress.com
What is the RBI view?
• The central bank has so far never come out 
favorably about the creation of a bad bank 
with other commercial banks as main 
promoters. 
• Former RBI Governor Raghuram Rajan had 
opposed the idea of setting up a bad bank 
with a majority stake by banks, arguing it 
would solve nothing.
Source: www. indianexpress.com
What are the 
alternatives to a bad 
bank?
• Many industry experts and government 
officials involved in economic policy-making 
argue that the enactment of IBC has reduced 
the need for having a bad bank, as a 
transparent and open process is available for 
all lenders to attempt insolvency resolution.
Source: www. indianexpress.com