Bad Bank , Neo banks Flashcards
BAD BANK
A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations.
OR
A bad bank is a financial entity set up to buy Non-Performing Assets (NPAs), or Bad Loans, from banks.
The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints.
After the purchase of a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in purchasing it.
A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it paid to acquire the loan from a commercial bank.
However, generating profits is usually not the primary purpose of a bad bank — the objective is to ease the burden on banks, of holding a large pile of stressed assets, and to get them to lend more actively.
Recently, the Ministry of Finance has announced that the National Asset Reconstruction Company (NARCL) along with the India Debt Resolution Company (IDRCL) will take over the first set of bad loans from banks and try to resolve them.
Banks where no recovery on loans are there and the loans are transferred to NPA (Non-Performing Assets) are known as BAD BANKS.
First BAD BANK OF THE WORLD, U.S.A. by Malen bank. in 1988.
NEO BANK
A neobank is a digital bank that does not have any branches. Instead of having a physical presence at a set location, neobanking is entirely online. A broad collection of financial service providers, who primarily target tech-savvy customers, comes under the umbrella of neobanking.
Neobanks are fintech firms that function like banks and operate digitally – a collection of financial apps and services. Every transaction is done online and is entirely safe, customised, and more convenient in several aspects compared to traditional banks. Neobanks break old banking traditions such as cash deposits, bulky documentation, and personal interaction with a bank official.
The primary purpose of neobanking in the economy is to provide cutting-edge financial services and facilities through fintech and AI at a lower cost. It’s a gap that the current applications of traditional banks don’t fill!
There are no conventional brick-and-mortar branches of neobanks. Although not directly regulated by RBI, neobanks in India have banking partners such as ICICI, HDFC, and other banks which are registered with RBI.
TOP NEO BANKS IN INDIA
FREO
JUPITER
FI MONEY
RAZOR PAY X
ZIKZUK
BAD BANKS OF INIDA
National Asset Reconstruction Company Limited (NARCL) is India’s first ever bad bank.
A total of 38 accounts worth ₹82,845 crore have been identified for transfer to the NARCL.
“The transfer will happen in a phased manner, and in phase one, about 15 accounts aggregating to ₹50,000 crore are expected to be transferred to NARCL. We are trying to have these accounts transferred within this financial year,” Khara
What is a Non-Performing Asset?
NPA refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest.
In most cases, debt is classified as non-performing, when the loan payments have not been made for a minimum period of 90 days.
Gross non-performing assets are the sum of all the loans that have been defaulted by the individuals who have acquired loans from the financial institution.
Net non-performing assets are the amount that is realised after provision amount has been deducted from the gross non-performing assets.
Bad banks in news in JUNE
The health of the balance sheets of Indian banks has improved significantly over the last few years with their Gross Non-Performing Assets (GNPA) ratio declining from a peak of 11.2% in FY18 to 6.9% in Q2FY22.
NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.
The government had already announced sovereign guarantees of Rs 30,600 crore for Security Receipts (SRs) to be issued by NARCL, which will be buying Rs 2 lakh crore non-performing loans from banks.
What are the Pros and Cons of a Bad bank?
Freedom to Use Freed-up Capital:
PROS
# Single Exclusive Entity:
It can help consolidate all bad loans of banks under a single exclusive entity.
The idea of a bad bank has been tried out in countries such as the U.S., Germany, Japan and others in the past.
The troubled asset relief program, also known as TARP, implemented by the U.S. Treasury in the aftermath of the 2008 financial crisis, was modelled around the idea of a bad bank.
By taking bad loans off the books of troubled banks, a bad bank can help free capital of over Rs 5 lakh crore that is locked in by banks as provisions against these bad loans.
This will give banks the freedom to use the freed-up capital to extend more loans to their customers.
It can help improve bank lending not by shoring up bank reserves but by improving banks’ capital buffers.
To the extent that a new bad bank set up by the government can improve banks’ capital buffers by freeing up capital, it could help banks feel more confident to start lending again.
CONS
# Merely Shifts one Pocket of Government to another
# Nature of Ownership:
Unlike private banks, which are owned by individuals who have strong financial incentives to manage them well, public sector banks are managed by bureaucrats who may often not have the same commitment to ensuring these lenders’ profitability.
To that extent, bailing out banks through a bad bank does not really address the root problem of the bad loan crisis.
# Risk of Moral Hazard:
Commercial banks that are bailed out by a bad bank are likely to have little reason to mend their ways.
After all, the safety net provided by a bad bank gives these banks more reason to lend recklessly and thus further exacerbate the bad loan crisis.
New MD and CEO of NARCL
The National Assets Reconstruction Company Ltd (NARCL), the special purpose vehicle set up as a joint initiative of public and private sector banks to consolidate stressed assets for resolution, has named Natarajan Sundar as Managing Director and Chief Executive Officer on 30th MAY.
NATARAJAN SUNDAR is a former STATE BANK of INDIA official.
Assets Reconstruction Companies
ARC’s are registered under the RBI.
ARC’s are registered under the SARFAESI ACT, 2002.
SARFAESI ACT, 2002:
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act. By virtue of the SARFAESI Act 2002, the Reserve Bank of India has the authority to register and regulate Asset Reconstruction Companies (ARCs).
Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance defaults on repayment of a loan and their account is classified as Non performing Asset by secured creditor, then secured creditor may repossess the security asset before expiry of period of limitation by written notice.
