The Goodness within the Bad Bank in India

A bad bank is an entity that purchases distressed assets from a bank at sizeable discounts to book value and then searches for buyers for those assets. A proposal to establish a bad bank was outlined in the Indian Union Budget 2021-22. In this paper, an attempt has been made to explore the advisability of having a bad bank in India. To begin with, the evolution of the existing Indian legal framework for bad debt resolution is examined. This is followed by a discussion on the various features of a bad bank, particularly about how it can prove to be an effective tool to ameliorate a stressed banking sector. An analysis of the mounting bad debts in India is undertaken to appreciate how a bad bank can turn out to be a revolutionary initiative. The author also reviews the growth of bad banks established in various countries and weighs the potential of a similar experiment in India. Based on the experience of existing asset reconstruction companies in India, an evaluation of the potential impediments to the Indian bad bank is also made. The author proposes recommendations for the successful functioning of the bad bank and indicates areas for necessary legal and systemic interventions. It is also emphasised that a bad bank in isolation may not give the desired outcome and an overhaul of the Indian banking sector is the need of the hour. The paper is concluded by making a strong case for establishing a bad bank in India