Bad Banks– A bad bank is a corporate structure that isolates illiquid and high-risk assets (typically non-performing assets/loans) held by a bank or a financial organization. A bank may accumulate a large portfolio of debts or other financial instruments which unexpectedly become at risk of partial or full default.
A large volume of non-performing assets usually makes it difficult for the bank to raise capital.
History of Bad banks,
The concept of a bad bank was pioneered at the Pittsburgh-headquartered Mellon Bank in 1988.
what is Asset Reconstruction Company(ARC)?
ARC is a specialized financial institution that buys the Non-Performing Assets (NPAs) from bank and financial institutions.
Sounds similar right? yes, but there is a slight difference between ARC and Bad bank. Instead of selling your NPAs to ARC, you can transfer it to bad banks.
A bad bank is creating a separate institute to segregate illiquid and high-risk assets or loans held by a bank or a financial institution, or perhaps a group of banks or financial institutions. This bad bank can be formed by the bank or by a group of banks or by the government.
Learn more: History of U.S. dollars vs Indian Rupees.
(ARC) which specializes in the recovery of chronic NPAs. These ARC buys the NPAs from a commercial bank for a price and recovers professionally the bad loans on a war footing.
AMC (Asset Management Company) is nothing but Bad Banks only.
Conclusion-Beniftis of Bad Bank
The primary goals of production of the bad bank are
- To clean the monetary records of banks in India.
- To empowers the banks to arrive at the necessary degree of capital ampleness by activating new capital from the market. and,
- (c) focus in using a credit card development to support venture and at last financial development