What is so good about ‘Bad Bank’?

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The Union Cabinet has recently approved the creation of NARCL – which essentially is a bad bank. What is it exactly? How does it work? The key idea behind bad banks is to destress the prominent commercial banks.

A bad bank is a bank that will take over the bad loans of other banks. The loans that banks give out are where the banks really earn interest. This is the amount that the borrower has to return to the banks. Imagine a situation, where a person borrows money for his/her business but the individual is not able to pay back his/her loan. It has happened in many cases wherein the business has failed and the person is not able to pay back loans to the bank. In this case, the bank turns less profitable, as it has to make up for the loss incurred due to bad loans. It will also become risk-averse, which means it will hesitate to take risks and extending more loans to business ventures. In the worst case, the banks may also sink. If several banks face this consequence the economy of that country will be threatened. This is the primary reason that the government of India has set up a bad bank.

To know more about how a bad bank works, watch the full video…