In her Budget speech this year, Finance Minister Nirmala Sitaraman announced that the government will set up a ‘Bad Bank’ to better manage the ‘bad loans’ (non-performing assets) of public sector banks. The idea, apparently, is to transfer the NPAs of public sector banks to the books of this Bad Bank, which will function as a two-in-one institution – an asset reconstruction company and also an asset management company. It will focus solely on asset recovery, freeing up the banks to concentrate on lending. At least that’s the theory.
But will it actually work in practice? Will the Bad Bank be effective in cleaning up the NPA mess? If cleaning up the books is the objective, how is a bad bank a better option than, say, the Insolvency and Bankruptcy Code? We explore these questions and more in a discussion with Vivek Kaul, the author of the bestselling Easy Money trilogy. Vivek’s most recent book is Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System.