A government-controlled bad bank is being projected by a section of experts as a panacea to the massive NPA (non-performing assets) problem in India. It is not. In fact, a state-owned/controlled bad bank could lead to a major anomaly in the pricing of bad assets. That will be counter-productive for the health of the banking system in the long-term.The government, which does not have enough money to recapitalise state-run banks or have an alternative plan to address the NPA problem, seems to be pushing the bad bank creation. The government is reportedly considering a proposal from the banking industry lobby, the Indian Banks Association (IBA) and the viability of the proposal is being looked at right now.Going by the IBA proposal, the bad bank will have an ARC-AMC model and an alternative investment fund (AIF) will be set up to buy the stressed assets from the banking system. Logically, the government will invest in the proposed bad bank initially while in due course banks and outside investors will pool in money. The creation of a bad bank supported by the government and industry is being pitched as a critical banking reform in Asia’s third largest economy. Indian banks have nearly… Read full this story
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