Many people here doesn’t know about what bad bank is, what this bank is going to do, why it is different from traditional bank, all about bad bank will be discussed in this blog.
Recently in India there is an proposal for bad bank its kind of new term I have listened, so to understand this hole concept I decided to make an deep dive into this and this is what I have find in my search.
Introduction
NPA ( Non performing Assets) is becoming an really big problem for Indian banks due to NPA so many bank shutting down there business. In common word bank calls it BAD loans. Due to bad conditions of bank in India
IBA ( Indian banks association) gave an proposal directly to government of India to make an bad bank. According to them bad banks can really help to revive banks from the troubles of NPA.
The concept of Bad bank
In common words bank called there NPA as bad loan and to counter these bad loan IBA suggested to make an bad bank, so basically the name bad bank is inspired from term bad loan because the aim of bad bank is to deal with bad loan.
It might be not understandable to you at this time but carry on reading this blog will clear all your doubts
why bad loan is Ann thread to traditional bank ??
We all know how bank works, we deposit our money bank gives us interest and then bank lend that money businesses on higher interests. That higher interest is the profit of the bank in ideal condition when lenders is paying all the instalments. But when lenders is stop paying the EMI then it becomes problem for bank, so after that bank start the legal process but in most of cases they are unable to recover the money and in that condition that money becomes NPA of BAD loan for that bank, and banks have to show all the figures in the balance shit due to higher bad loans they are unable to show the profit and it will become financial tread for those banks because to make bank promising they have to show profit so that people can believe on them but in this condition they are unable to do that.
BAD bank as rescuer of traditional banks
To make balance shit of bank good there should be an option to remove those loans but it’s not possible if bank will start doing this then more and more people will start doing this so it’s really an bad condition for economy, so hear comes BAD bank in the picture bank are unhappy with there bad loans they just want to remove that, they will be very happy if any institution will take that bad loans in there heads or it will be even more great if some buy those loans. So bad loans are heat to buy those bad loans from traditional bank, as this new entity is buying bad loans it named as BAD BANK.
Till now all of you have understand What bad bank is dealing with, but wait how will bad bank work how they will generate profit to make bad bank running.
Working & profit
There is two condition for banks
- They work for hire bad bank to recover bad loan and give them some percentage
- either they sell all the holdings of bad loans and let bad bank handle that whatever they recover it’s all depends on them
So 2nd options is great for bank if they choose first one then they have to continuously show that figure in balance shit and they don’t want to do that and they also have to pay for it to hire them.
Now if they choose 2nd option then it will be like win situation for banks because in this condition they can sell those loans which are like waste and headache for them and can generate some profit which is healthy for there balance shit
After bad bank buys those loan then, Not every bad loan is unrecoverable some of them them can we recovered if some strict actions are taken so people of bad bank are going to be mastered in this, dealing with people and trying to recover them is going to be the working model of bad banks
After buying all ownership of bad loans now the profit and loss all belong to bad bank if they are able to recover certain percentage then they are going to profit as they are going bought bad loan at really cheap price.
So the profit and loss model is made from recovery if those loans.
how it’s different from traditional bank ??
We have learned how this bank is going to work, working model of this bank doesn’t include any of facilities that traditional bank offers like opening accounts, giving loans and other services it’s completely different from the working of traditional bank. The only thing they offer is buying the bad loans from banks and try to recover that. That’s the working model of that which isn’t revealed till now.
Hope you find this post meaningful and have understood what bad banks are if you like my work then do upvote- rehive - follow