[Solved] With reference to Indian economy, the term 'bad bank' (2024)

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[Solved] With reference to Indian economy, the term 'bad bank'? ›

Detailed Solution

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.

In a Special purpose entity (SPE), the bank transfers its bad assets to another organization, typically government backed. This solution requires significant government participation. Finally, in a bad bank spinoff, the bank creates a new, independent bank to hold the bad assets.

The Government used a two-pronged strategy to solve the twin balance sheet problem. They are recapitalisation of banks to increase the provisioning for Non-Performing Assets (NPA) and the introduction of the Insolvency and Bankruptcy Code (IBC) Bill.

Bad Loans Meaning

Loans from a bank that have not paid interest for more than 90 days are known as Bad Loans or Non – Performing Assets (NPAs). In other terms, a loan is considered a non-performing asset (NPA) if the bank ceases receiving payments on the principal and interest for more than three months.