Goseeko blog

What is a bad bank ?

by Uddipana Gogoi

Bad bank is a corporate entity that was formed to clear the non performing assets of banks.  It isolates illiquid and high risk assets (typically non-performing loans) of banks.  It consist of two entities- Asset Reconstruction Company Limited (ARCL) and India Debt reconstruction Company Ltd. (IDRCL). The ARCL takes over the bad loans of commercial banks in a 15:85 ratio. Security receipts will be issued against 15 percent of total book value of bad loans taken over and remaining 85 percent will be paid after recovery of loan amount. The ARCL will recover the non performing assets by selling the same in auction with the help of IDRCL. The Union finance minister in the budget 2021-22 speech has revealed about the setting up of bad banks to manage the bad loans of public sector banks. 

Features of bad bank

Some of the features of bank are –

  1. Firstly, it helps commercial banks to clean up their bad loans/non-performing assets.
  2. Secondly, it does not involve acceptance of deposits and lending of money.
  3. Lastly, it recovers the bad loans by selling the assets on auction basis.


Some of the merits of bad bank are-

  1. Firstly, the burden of banks regarding bad loans will reduce.
  2. Secondly, it helps in speedy and better recovery of bad loans.
  3. Thirdly, it provides financial stability to banks.
  4. Finally, banks are able to concentrate better in other productive functions


Some of the disadvantages of bad bank are –

  1. Firstly, it needs a large amount of capital to purchase stressed loan of public sector banks.
  2. Secondly, it is unable to address corporate governance of commercial banks that lead to non-performing assets.
  3. Thirdly, it encourages banks to take undue risks leading to a moral hazard.
  4. finally, challenges on its ownership structure as well as the pricing of bad loans of banks are taken over from banks. 

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