Bad Bank to Acquire ₹2 Trillion by FY26

NARCL aims to take over ₹2 trillion worth of banks’ stressed or non-performing assets (NPAs) by FY26.

By FY24, NARCL had already achieved the ₹1-trillion mark in NPAs acquisition.

About Bad Bank

• A bad bank is an Asset Reconstruction Company (ARC) or Asset Management Company (AMC).
• Loan Management: It takes over bad loans from commercial banks, manages them, and recovers the money over time.
• Balance Sheet Cleanup: Helps commercial banks clean up their balance sheets and resolve bad loans.
• Operations and Financials
  • No Lending or Deposits: The bad bank does not engage in lending or taking deposits.
  • Loan Acquisition: Takes over bad loans typically below their book value.
  • Recovery Efforts: Aims to recover as much of the loan value as possible.

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National Asset Reconstruction Company Ltd (NARCL)

• NARCL acts as a bad bank in India. 
• The plan to form a bad bank was announced in the Union Budget 2021-22 for handling large loans of over ₹500 crore.
• New Structure
  • NARCL’s Role: Acquire and aggregate bad loan accounts from banks.
  • IDRCL’s Role: India Debt Resolution Co. Ltd (IDRCL) will handle the resolution process under an exclusive arrangement with NARCL.

Challenges Faced by Bad Banks

• Complex Valuation: Determining the fair value of NPAs is complicated and often disputed.
• Financial Risks: Overvaluation can cause losses, while undervaluation may result in inadequate recovery.
• Difficult Recovery: Extracting value from bad loans is challenging and lengthy.
• Capital Needs: Substantial capital is required to purchase NPAs from banks.
• Market Volatility: Fluctuations can affect asset sale and recovery efforts.
• Specialized Skills: Managing distressed assets demands expertise and specialized skills.

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Pros and Cons of a Bad bank

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