Bad Bank

Bad Bank

A bad bank is an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.

ARC are companies registered under companies act and regulated by RBI. SARFAESI Act 2002 provides the legal basis for the setting up of ARCs in India.

Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act(SARFAESI Act) 2002- protects financial creditors, who are mostly/bank banks and other non-bank financial institutions

IBC 2016- protects interests of all forms of creditors(Financial and Operational Creditors) and other stakeholders. It improved the ranking of India in Ease of doing business by protecting the interest of non banks creditors(FDI, FPI inflow increased). In case of conflict with other acts including SARFAESI Act 2002, the provision of IBC 2016 prevails over other act. 

After introduction of SARFAESI Act 2002 many ARC companies were setup across India. But these private ARC companies failed to fulfill its goal. 

From 2004-2013 Lenders could recover only about 14.29% of the amount owed by borrowers in respect of stressed assets sold to ARCs. This reaulted in loss of Bank money 

These ARCs have been helpful in resolution of stressed assets especially for smaller value loans.

To overcome issues of existing ARCs, GoI propsed in budget 2021 to setup NARCL-IDRCL framework

1. National Asset Reconstruction Company Limited(NARCL)- as a Public institution to buy bad loans mainly

2. India Debt Resolution Company Ltd.(IDRCL)- as a Private Institution to resolve the debt mainly

NARCL will acquire bad loan through 15% Cash and 85% in Security Receipts (SRs). Once NARCL aquire the bad loan, IDRCL will be engaged for management and value addition.

GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset and will be valid for 5 years.

In Nov 2021 RBI appointed a committee headed by Sudarshan Sen to examine the issues and recommend measures for enabling ARCs to meet the growing requirements of the financial sector.

Committee Recommendations

• Online Platform for Sale of Stressed Assets
• Expanding Scope of SARFAESI Act(Section 5 to cover non financial institutions as may be notified by RBI) 
• Providing Additional Resources
• Allowing to use IBC
• Large Loans for sale to ARCs
• Ensuring Debt Aggregation(loan+ intrest amount) 
• Fair competition of ARCs with NARCL(public entity) 

IBC 2016

Enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms. 

For Individual borrower →  Debt recovery tribunal(DBT) 

For Company/organisation →  NCLT

Process

1. Borrower/lender request to NCLT to initiate Insolvency process
2. Approval by NCLT
3. Lender appoint insolvency professional(IP- certified by Insolvency professional agency) 
4. Report submission to creditors committee by IP
5. Creditors committee take decision and ask approval of NCLT

The process is known as Corporate resolution insolvency process(CRIP) and CRIP should get completed within 330 days maximum. 

2021 Amendment

Introduction of Pre-Packaged Insolvency Resolution Process(PRIP) for MSME sector with default loan less than 1 crore. 

Resolution of debt through agreement between secured creditors and investors. The insolvency process can be initiated with approval of 2/3 creditors. 

During insolvency process the distress firm still remain under the control of debator(MSME). In CRIP process debator lost the control of company. 

Use of Swiss challenge for resolution plan

Fast track process with time limit of 120 days only(CRIP- 330 days). 

90 days for resolution plan + 30 days for adjudication(NCLT) 

Full Reserve Banking

Full-reserve banking(100% reserve banking or sovereign money system) is a system of banking where banks do not lend demand deposits and only lend from time deposits.

So all the deposit money(demand deposit) will stay in the bank as a reserve. And bank can earn by charging their customer for providing services.