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The IUP Journal of Bank Management
The Need for a ‘Bad Bank’ Model in Stressed Asset Resolution in India.
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Indian banking is passing through a difficult phase of twin balance sheet problem and depleting capital base. As defined by the IMF in its Global Financial Stability Report, October 2017, Indian banking is placed on a par with the leveraged banking system of PIIGS (Portugal, Italy, Ireland, Greece and Spain). The attempted solutions to the impaired asset quality problem, starting from measures like Central Repository of Information on Large Credits (CRILC), Joint Lenders Forum (JLF), CDR, SDR, S4A plan, Insolvency and Bankruptcy Code (IBC) (2016), Asset Restructuring Company (ARC), etc., have not yielded the desired result, and today 11 Public Sector Banks (PSBs) have already figured under RBI’s Prompt Corrective Action (PCA) mechanism. Lenders are today not so comfortable in referring the stressed assets for insolvency proceeding to the National Company Law Tribunal (NCLT), given the present IBC-2016 structure. As Bad Bank (BB) model has been successful in many advanced economies in resolving the impaired asset quality issue, the time has come for Indian banking to try this model. The present study has analyzed different forms of BBs and their relative merits and demerits in the Indian context. Given the dominance of PSBs in Indian banking, the study suggests an appropriate government-owned BB model to relieve the leveraged banking system.

 
 
 

The ‘Bad Bank’ concept was first brought into practice by the ‘Baring Brothers’, a London investment bank during the ‘Baring Crisis’ of 1890. Excess exposure in underwriting commitments in Argentine bonds pushed the bank to a liquidity crisis and was rescued by the Bank of England (BOE) at a cost of £7.5 mn. This led to transfer of ongoing business of the ‘Barings’ to a new company (the Good Bank), while the assets of the old partnership were liquidated to pay back BOE. The outstanding assets, including illiquid Argentine bonds and other suspect assets, were transferred to a new entity named Baring Estate Company (Bad Bank) which paid off the BOE with funds raised through issuing debentures. Subsequently, when the bonds became marketable, the BEC paid off the debentures and was liquidated in 1898.

 
 
 
Bank Management Journal,Global Financial Stability Report,Central Repository of Information on Large Credits (CRILC), Insolvency and Bankruptcy Code (IBC),Prompt Corrective Action (PCA) mechanism, National Company Law Tribunal (NCLT).