Bad Bank or Asset Management Company (AMC) for NPA Resolution

Why do we need a bad bank ?

Current NPA resolution frameworks has shown limited success, in order to tackle current NPA crisis a new institute should be formed. A Bad Bank is essentially important in NPA resolution process because of following two reasons:

1) A Bad Bank will help in separation of Good and Bad assets, this will make banks to focus on their business expansion with good assets.
2) Separated Bad Assets can be focused to maximum recovery so that burden or cost on the banks or the government can be minimised.

International experience shows that, using the above vital principles, a Bad Bank can address the NPA resolution challenge more effectively.

Possibilities of a bad bank in India ?

The concept of bad banks has been tries by a number of countries to deal with their banking crisis, the results are of varying nature. Based on these experiences one thing is clear that the new institution should be independent and transparent in it's operation with high emphasis on professionalism.

Base on the experience in other countries, it is found that "Accountability to the government or its agencies" and "Managerial efficiency" are two vital points while implementing the approach.

The Bad Bank so created cab be financed using any of the four possible sources:

1) Equity injection by the government
2) Special loans from the central bank
3) AMC bonds
4) Public offering of shares

Out of the four sources, issuance of AMC bonds has been the major source of finance in a majority of the countries. Moreover, as results from other countries suggests the success of a "Bad Bank" depends on a number of factors as shown below:

1) There should be a clear distinction between the bad and good assets.
2) The economy should bounce back to high growth trajectory.
3) Preventive measures must be in place, to prevent new loan from becoming an NPA too soon.

The fulfilment of the above conditions will determine the degree of success of the "bad bank" or the "asset management company".