21.2         ndian      onom
                                                                bad bank is simple, the implementation can be
         1. BAD BANK                                            quite complicated. A variety of organisational and
                                                                financial options are there to design them. The
     introDuction                                               RBI has signalled in favour of setting up such a
     The burden of bad debts, i.e., non-performing              bank, but it has also highlighted the concern of
     assets (NPAs) of banks, especially of the public           ‘designing it properly’.
     sector banks (PSBs), has been increasing with
     every passing quarter for the last few years—              moDels of bAD bAnk
     caused by various reasons. By the end of March             We find four different models of bad bank in the
     2017, stressed assets of the banking system were           world depending on need of the hour, which are
     over 12 per cent of their total loans. The PSBs            briefly described below:
     that own almost 70 per cent of the banking assets,
                                                                     (i) On-balance-sheet guarantee: In this
     had a stress–loan ratio of almost 16 per cent. This
                                                                         model, the stressed banks get a loss-
     is the main reason why for the past many quarters
                                                                         guarantee from government for a part
     banks have been unwilling to process fresh loans.
                                                                         of its portfolio (i.e., bad assets). This is
     At the end of last quarter of the 2016-17, credit
                                                                         a simple and less expensive format and
     growth has become negative and the lowest in over
     two decades. To solve the crisis of the high NPAs,                  can be implemented quickly. Though
     the Reserve Bank of India (RBI) has introduced                      bad loans get government guarantee,
     multiple schemes over the last few years—Flexible                   they remain on the balance sheet of the
     Refinancing of Infrastructure (5/25 scheme), Asset                  bank. It means while the bank becomes
     Reconstruction Companies (ARC), Strategic                           confident about its bad assets, they are
     Debt Restructuring (SDR), Asset Quality Review                      still not in position to start fresh lending.
     (AQR) and Sustainable Structuring of Stressed                       This model does not fit in India’s needs of
     Assets (S4A). But these measures have not brought                   today.
     much relief to the banks. As conventional remedies             (ii) Internal restructuring unit: This model
     seem to be failing to address the menace, a bit less                is like creating a bad bank inside the
     conventional remedy is gaining ground, which                        stressed bank itself. Banks put their bad
     suggests the Government to set up a bad bank.                       debts in a ‘separate unit’ inside their own
                                                                         financial structure and set up separate
     the concePt                                                         management team to handle the bad
     Theoretically, bad banks1 work on simple concept,                   assets—the team is given clear incentives.
     i.e., banks’ loans are classified into two categories,              This helps banks increase transparency
     good and bad. The bad loans of the banks are                        (as figures related to bad loans become
     bought or taken over by the bad bank while the                      public) and boosts confidence among
     good loans are left with the bank itself. This way,                 their shareholders. It however, fails to
     bad loans do not contaminate the good assets of                     enable them restart fresh lending. This
     banks. As banks hit by the problem of bad loans                     model also does not look suitable for
     become financially viable entities, they restart                    India.
     their lending process. While the concept of a                 (iii) Special-purpose entity: This model is
                                                                         a bit different from the two described
         1.  The write-up is based on the Economic Survey 2016-
             17, documents of the RBI and other Government               above. The bad loans of the banks are
             sources.                                                    ‘offloaded’ from the balance-sheet of