A bad bank is especially made to by bad loans and illiquid holdings of financial institutions. The Government had brought in something similar to the idea of a bad bank called ‘Project Shashakt’ for public sector banks. It had a five-point plan involved for bad loan resolution.
This time bad banks might work for many reasons, one of them being it isn’t that costly anymore. The value of non-performing assets (NPAs) with bank have dropped dramatically. The high net books of NPAs caused a hindrance to create bad banks. But as of now it is hardly 15%.
Another reason would be that if the bad loans are transferred to another company, banks can look at new businesses and productive lending. Banks are currently experiencing slow credit growth and creation of bad banks can help in boosting it, allowing them to look for new avenues.
