Page 33 - Banking Finance December 2022

ARTICLE

NPAs impact on Banks: Competition: There is a competition amongst the bank
themselves and provide higher quantum of unsecured loan.
Banks have to keep aside fund to make a provisioning of
prescribed percentage to compensate for the loss due to
What is a bad Bank?
bad assets. It affects the profitability of banks as they have
lesser funds available for lending. As a result of rising NPAs The idea of a Bad bank was first mentioned in Economic
of banks reduce the money supply in the economy and survey 2016-17. Public Sector Asset Rehabilitation Agency
leading to an economic slowdown. As a result of provisioning or PARA, to buy out the NPAs of high value from Indian
and losses incurred by the bank capital crisis also occurs Banks. Two Models proposed by Shri Viral Acharya; former
which results in capital demand from the Government and RBI Dy. Governor in their speech on ways to Resolve Banks
the Govt. has to infuse the capital for the credit flow in the Stressed Assets. 1. PAMC- Private Asset Management
economy. Company, 2. NAMC- National Asset Management Company.
The Indian Banks Association (IBA), have refloated an old
There are some main reasons for the rise in banking NPA's. idea of creating a bad bank to Finance Ministry and RBI,
proposing equity contribution from the govt. and the banks.
Crony capitalism: It is the nexus between political and the
business class which have led to the rise of NPAs in banks. Bad bank is an Asset Reconstruction Company which are
specialized financial institutions that buy NPAs of banks/
The Government policies: Some of the government policies lenders to help clear their balance sheets. Banks sell stressed
viz. waiving of agricultural loans have increased NPAs of assets such as delinquent loans to bad banks at a mutually
public sector banks. agreeable price to get rid of them and focus on normal
banking services. ARCs purchase the rights of banks in loans,
Frauds of high magnitude: Some frauds happened in the debentures and bonds with the main intention of recovering
recent past which leads to rise in NPAs. Such as the Rs.14000 them over time. The banks sell their non-performing assets
crore scam in Punjab National Bank by Nirav Modi as per to ARCs, where they get 15% of the value of these assets in
the news. cash upfront as per RBI norms and the remaining 85%
through security receipts (SRs) and bonds, which have a
The Global Finance Crisis: The global crisis in 2008 impacted maximum maturity period of six years. When ARCs recover
corporate's ability to repay their bank loans which in turn the bad loans, they repay the banks after deducting
impacted the banks ability to lend more money to management fees.
corporates.
As per IBA proposal The Bad Bank will be a 2-tiered
Bad Lending Practices: When the bank neglect basic factors structure;
like repaying capacity the accounts turns NPA in future.
Tier I: ARCs backed by Government
Tier II: ARCs run by Pubic and Private Bodies including banks.

Regulations for Asset Reconstruction Company:
Asset Reconstruction Company is a company registered
under section 3 of the Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act 2002.

It is regulated by Reserve Bank of India as Non-Banking
Financial Company (u/s 451(f) (iii) of RBI Act 1934)
ARCs must have minimum Net Owned Funds of Rs.100
Crore and maintain a Capital Adequacy Ratio (CAR) of
15% of RWA (Risk Weighted Assets).

The banks must transfer NPAs to ARCs at the net book

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