Is Bad loan actually bad? Banking Awareness Series

Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will be introducing the candidates with some banking awareness topics  On a daily basis that will improve their general awareness and will also ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is Is Bad loan actually bad? 

                                                                                Is Bad loan actually bad?

Bad Bank Concept: It is a corporate structure which identifies illiquid and high risk assets which are held by a bank or a financial institution or even group of banks and financial institutions. Large number of non-performing assets makes it difficult for the bank to raise capital or funds.

The proposal to privatise the Public Sector Banks is only due to bad loans that have been fully provided for the bad bank proposed in the budget is, at one level, prudent, and ,at another, too prudent.

Generally, there are two kinds of questions remain when bad assets are transferred. One is about the bad loan’s origination and pricing for transferring to the bad bank and second one, was there any mala-fide in the original sanctioning of the loan. What should be the fair price for the bad loan that the bad bank buys from the bank? The valuation problem can be resolved by letting a third party determine a value and having that reviewed by another set of eyes. The setup committee will help protect the integrity of decisions taken by bankers. The bad bank must be operated and run by professionally and maintain an arm’s-length relationship with the bank. The bankruptcy courts should do their job efficiently, and the market for corporate bonds must mature.