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What are bad banks, why India is moving towards it?

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Bad banks the bank is quite different from its name. These are banks which are developed for the NPA (Non-performing loan) or the bad assets of the bank. This bank is made just to focus and make a fresh list of all the defaulters. The basic function of this bank is to make a list of all NPA and try to recover.

Why it is important

As the defaulters are increasing day by day banks have to take some tough decisions and tough call for this. So, keeping that in mind these banks are made. It may be made by one bank or may be by different numbers or banks even may collaborate with other financial institution. So, keep an upper hand on defaulters these types of bank is a demand of time.

Why bad banks

When the NPA increases the balance sheet of the bank got disturbed. The credibility of the bank decreases. It may affect the bank very adversely. In recent day we had heard news regarding write-off of the NPA of about 66000 crores which is really a devastating number. So to make control over this bad banks are established.

What are bad banks, why India is moving towards it?
bank illustration

Work and function of bad banks

Let us take an example for this’ suppose a bank has given a loan of 500 crores to someone and able to get only 400 crores back, the remaining 100 crores will become NPA. The bank which had given the loan may consult the Bad Bank to recover the NPA and giving them all the data and documents regarding the loan. Then the bad bank will provide 50 crores or some fix charge to the bank and the bank is now free from the NPA, now it is the duty of the bad bank to recover those NPA.

If the bad bank is capable and able to recover the 100 crores then there will be a total profit of the 50 crores to the bad bank because it had paid only 50 crores to the regarding bank, but if the bad bank is unable to acquire the 100 crores then there will be a direct loss of 50 crores as it had already paid to the bank.

So, this is the basic function of this bank. These banks become necessary when the NPA of the banks starts increasing day by day. It is seen in India the NPA is increasing. Some willful defaulters are also seen now a day. They manipulate banks and take loans and later deny for repay for example- case of Vijay Malaya and Neerav Modi both are willful defaulters. So, to get control over such type of people these banks became important.

Future in India

Well, it can’t be said be anything now. There is a large demand for this from long time but government never take this topic seriously but in coming time if we see a bad bank in India then it won’t be much amazing for one because what’s happening here is always making a demand and many intellectuals started this discussion at the next level. So, it may be possible that India may have their 1st bad bank in recent or some coming years.

Well this is the analysis of the topic and I hope you must understand this. Bad bank is not a new concept its being working in many countries more than 60 countries. But, it is also true that it might not be going to established in India because some are favoring this some are not so a contradiction is among the intellectuals. Let’s see what happened.

(In this post, the author talks about what is a bad bank and his opinion and prediction on the establishment of a bad bank in India.)

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