Answer Writing Practice for UPSC IAS Mains Exam: Paper - IV (General Studies – III) - 30 October 2018


Answer Writing Practice for UPSC IAS Mains Exam


UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. What do you understand by a ‘Bad Bank’? Discuss how a ‘Bad Bank’ can solve the NPA problem. (250 words)

Model Answer:

Approach:

  • Why in news?
  • Bad Bank
  • NPA
  • How a ‘bad bank’ can solve the NPA problem
  • Conclusion

Why in news?

The Central government has revived the idea of setting up an asset reconstruction or asset management company, a sort of ‘bad bank’ first mooted by Chief Economic Adviser Arvind Subramanian in January 2017.

The non-performing assets (NPAs) in the Indian banking system have become a big concern – posing a threat to the stability of the country’s financial system and the economy. India has been ranked fifth on the list of countries with the highest Non-Performing Assets (NPAs), by CARE Ratings.

Bad Bank

A bad bank is envisaged as an entity that would buy non-performing assets from other banks to free up their books for fresh lending and then suitably dispose of the toxic assets.

Chief Economic Adviser Arvind Subramanian had envisaged a Public Sector Asset Rehabilitation Agency (PARA) that would take on public sector banks’ chronic bad loans and focus on their resolution and the extraction of any residual value from the underlying asset. This would allow government-owned banks to focus on their core operations of providing credit for fresh investments and economic activity. It would thus work as an indirect bailout of these banks by the government.

NPA

Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA). The loans given by the bank is considered as its assets. If the principal or the interest or both the components of a loan is not being serviced to the lender (bank), then it would be considered as a Non-Performing Asset (NPA).

NPA in terms of RBI regulations result out of non-payment of interest for a period of 90 days or non-payment of the principal amount for 90 days or more. So beyond that point, it is called Non-Performing Asset.

How a ‘bad bank’ can solve the NPA problem

Hiving off stressed loan accounts to a bad bank would free public sector bank balance sheets from their deleterious impact and improve their financial position.

As the quality of a bank’s assets deteriorates, its capital position (assets minus liabilities) is weakened, increasing the chances of insolvency. Some analysts believe that many public sector banks are effectively insolvent due to their poor asset quality. Consequently, banks have turned risk-averse and credit growth has taken a hit. If managed well, a bad bank can clean up bank balance sheets and get them to start lending again to businesses.

But it will not address the more serious corporate governance issues plaguing public sector banks that led to the NPA problem in the first place

Conclusion

The bad bank is indeed a good concept however its proper implementation is required to have it address the problem of NPAs.

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