Bad Bank in Budget 2021: Finance Minister Nirmala Sitharaman has today made a provision in the budget on February 1 to set up a management company as a solution for non-performing assets (NPAs), which have become a serious problem for public sector banks. While presenting the budget, the Finance Minister said that high-level measures need to be taken to correct the books of the banks. For this, he has proposed the formation of an Asset Reconstruction Company Limited and an Asset Management Company which will be transferred to NPAs of banks. This is a bad bank concept. Apart from this, it has been proposed to recapitalize from 20 thousand crores in the budget to further consolidate the financial capacity of public sector banks.
The problem of NPAs in banks is becoming very serious. According to the RBI’s recent Financial Stability Report, the gross NPA of the banking sector was 7.5% of the loan book of the entire industry as of September 2020, which may increase to 13.5% by September 2021 this year.
Band Bank to takeover NPAs of banks
Finance Minister Nirmala Sitharaman said during the presentation of the budget that the company that will be formed to improve the financial condition of public banks will take over the entire amount of NPA i.e. the amount of NPA from the bank’s account to this company Will transfer. However, more information about this has not been provided yet.
What is bad bank
Bad Bank is an asset management company in which NPAs of banks are transferred. It is a bank in a way, but it starts with bad assets. It takes NPA from banks at a discount and tries to recover it. Bad bank does not do the work of lending or taking deposits, but through this it helps commercial banks to improve their books of account.
Propose a similar scheme in 2018
About three years ago, the Central Government announced the Project Sashakt scheme in 2018. The scheme was prepared on the basis of the report of the committee constituted under the chairmanship of Sunil Mehta. Under this, a provision was made to implement the five-point formula. At that time, the government had said that AMC would be formed for loans over Rs 500 crore which would buy the NPAs of banks. The government will not interfere in this company. The Sunil Mehta committee included SBI Chairman Rajneesh Kumar, Bank of Baroda Managing Director and CEO PS Jayakumar and SBI Deputy Managing Director C Venkata Nageswara.