Bad Bank, a Bad Idea

The idea of floating a “bad bank” in the context of the twin balance sheet problem faced by the Indian economy may really not be a good one if it is construed as a permanent solution to address the menace of increasing non-performing assets (NPAs) of public sector banks.

The practice of reckless spending continued from the First to the Eighth Five Year Plan. This resulted in a situation of acute fiscal mismanagement and contributed to inflationary pressures. This can continue even with the establishment of the Public Sector Asset Rehabilitation Agency (PARA) or the bad bank. Once this arrangement comes into force and the bad loans get transferred to PARA, it is reasonable to expect that the banks may become lax and complacent in lending matters. Banks may come to think that even if some loans do not get recovered, the government will ultimately bail out such NPAs.