Finance Ministry panel to consider setting up bad bank

The Ministry of Finance has set up a committee to consider the possibility of setting up a ‘bad bank’ to expedite resolution of stressed assets of banks.

According to interim Finance Minister Piyush Goyal, a committee has been set up under the chairmanship of Sunil Mehta, non-executive Chairman of Punjab National Bank, “to deliberate whether it is worth considering setting up of an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) to deal with assets having exposure to several banks."

The idea of setting up a ‘bad bank’ has been suggested by many banking experts, including Reserve Bank of India Deputy Governor Viral Acharya. The idea has been also mentioned in the government’s Economic Survey.

A bad bank is set up with the sole objective of buying non-performing assets of the banks at market price. This will help the banks to clean up their balance sheets by selling their distressed loans to the bad bank and enable them to focus on their regular business of borrowing and lending.

The proposal to set up bad bank is a welcome move, but the government needs to take adequate measures to make sure that the lending banks do not interpret the facility of transferring bad loans to the bad bank as a licence to indulge in even more indiscriminate lending, assuming that the bad bank will take care of all their bad loans. As it is, even without a bad bank, the gross non-performing assets (GNPAs) of banks have soared to more than Rs. 10.30 lakh crore as of March 2018. With a bad bank to take care of NPAs, the situation might get even worse instead of improving, and if this happens, the medicine would prove to be worse than the disease.