ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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NPA Resolution and Bad Bank

The success of the newly announced “bad bank” or the National Asset Reconstruction Company Ltd will depend on its ability to maximise recovery with minimum costs. Three major conditions are critical for the NARCL to succeed. First, clarity in identification of non-performing loans. Second, a high growth trajectory in the economy. And, third, preventive measures to stop any new loan turning into a non-performing asset too soon.

 

The finance minister has recently ann­ounced the creation of the Na­tional ­Asset Reconstruction Co­m­pany Ltd (NARCL), which will play an instrumental role in the resolution of non-performing assets (NPAs). As per the anno­uncement, large NPAs of banks will be transferred to the NARCL. It will help clean the balance sheets of the banks and reduce stress. The idea behind the creation of this institution is to help the banks focus more on lending activities rather investing a significant amo­unt of time and resources in dealing with failed loans.

Given the severity of the current NPA crisis, it important that the NPA resolution takes place in a timely manner to limit its negative impact on the banks and the economy. Any NPA resolution app­roach must be built on two critical aspects: (i) policies or measures that are preventive in nature so that the NPA crisis does not occur at this scale in the future, and (ii) policy or a resolution mechanism for existing accumulated NPAs, so that its negative impact can be minimised. The announcement with respect to the creation of a “bad bank” or “National Asset Reconstruction Com­pany” is focused on the latter aspect. This is driven by the understanding that it is important to clean up the balance sheet of the banks by eliminating or reducing bad loans. However, it is equally important to undertake policy measures that aims at the former aspect so that it will prevent the occurrence of additional NPAs. The policy measures that will be req­uired to address this aspect are structural in nature. It is important that both the above aspects are addressed through various policy measures for a robust NPA resolution or management mechanism.

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Updated On : 14th May, 2022
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