CEA VK Subramanian informed that the bad bank which was proposed in the FY22 budget can only be used for one time to clear the bad loans of the bank. It cannot be made recurring otherwise it will result in negative impacts. Banks would go for risky landings in that scenario.
Bad Bank was proposed by the FM on the budget for FY22 as an asset reconstruction or management company. Although its structure is not yet declared, banks are likely to transfer their bad assets in this bank which will reconstruct them and sell them to investors.
Bad assets are assets that have a negligible or no chance of recovery. They become a major hurdle for the banks which can limit the banking functions. They are rising in banks due to faulty risk evaluation, the absence of properly managing and ever-greening of loans.
For the last five years, the government is enforcing the major clean drive for the NPAs which resulted in lowering down of NPAs from 11.2% to 7.5%. It is believed the pandemic will make this situation worse by increasing NPAs. The Reserve Bank of India estimated that by September 2021 the gross NPAs of all band can rise to 14.8% under severe stress.