NARCL is empowered to start the operations of the bad bank that works with the liquidation and restructuring of banks. Non-performing assets or stressed assets are bought for cash or government receipts securities. In October, Finance minister Nirmalasitaraman announced and created bad banks in India. The IDRCL will take care of the bad debts and sell the stressed asset in the market. By reducing the bad debts, the burden of banks reduces. And also, it improves the core business. The concept of the bad bank has already evolved in foreign countries. Indonesia, Sweden, Finland, US and Belgium work for the stressed assets. The challenge associated with this business operation is finding the potential buyer to sell these assets. Banks lend loans from deposits, and it is essential to balance deposits and loans.
How bank of melon makes money:
The bad debts from banks in India approximately stand as worth two lakh crore. Around the globe, the first Bad bank was established by a US-based bank. The name of this bank is Mellon bank. The primary business of the Company is an asset management and investment. There are 35 branches around the world for BNY Mellon. The report of 2019 states that the result of Melon Bank is down by 4 per cent compared to 2020.This reduction in the impact of the sale of investment at lower rates and dealing with lower interest rates. Investment management and investment services are different services that are tailored for small and large investors. Investment services are about the activities that support the investment plan. Investment management is the activity that supports the investment goal of the individual investor. Investment management or wealth management is the service provided to institutional investors and individual investors. Portfolio management is the service that takes care of financial statement analysis, monitoring investments, stock analysis, portfolio goal planning and implementation. The financial instruments that are associated with this process are commodities, bonds, equities, and real estate. The market of the wealth management company is growing, and it had reached US$93.8 trillion in the year 2018.
What are the functions of NARCL?
The ownership of NARCL is with public sector banks. These banks hold a percentage of fifty-one. The stressed assets professional expert PM Nair from the State bank of India work as the managing director of NARCL. The deputy manager of SBI SS Nair and the General Manager of Canara Bank Ajit Krishnan Nair works as the board members. NARCL is the legal entity formed to get a license for an asset Reconstruction Company. The authorized share capital of this Company was 100 crore, and the amount of paid-up share capital numbers to 74.6 crores. The list of banks expected to transfer the stressed asset to NARCL is the Punjab national bank, State bank of India, and Union Bank of India. Around 22 stressed asset accounts with a value of 89,000 crores is expected to get transferred to NARCL.
The transformation of stressed assets is 15 per cent of cash and 85 per cent of security receipts. The SRs are guaranteed by the government to make the process of resolution of the stressed asset flexible. The guarantee from the government will be applicable for five years. The process of transformation of stressed assets happens in different phases. The higher valuation of stressed assets is possible with the Swiss challenge form of procurement. IDRC is the entity that works under NARCL for value addition and price discovery. Former RBI governor was against the creation of bad banks. He suggests that private sector asset management companies take care of these bad loans. The fair value of the stressed asset is the reason behind the creation of bad banks. It is easy to get a fair price as the security receipts are backed by the government. There are four types of non-performing assets. And they are standard, sub-standard, doubtful and loss. The loss is the category in which the recovery is difficult. These assets are called stressed assets or bad loans. Finding a buyer for these assets is a difficult task. The public sector banks transfer the bad loans. And they act as customers and shareholders to the bad bank. The dual role of public sector banks leads to fake transfers. The process is successful only when there is a buyer, and the transaction becomes successful.
Advantages of Bad banks:
• Bad banks help in handling the process of lending. It will generate capital for the smooth functioning of the banking process.
• ARCs help for restarting the developments of the macro economy. As the process is supported by the government, the process is happening on time.
• Banks are the backbone of the economy, and the Government needs to focus on reducing NPAs. Bad banks are not for the future prevention of NPAs, but it helps for the reduction of the NPAs.
• Flow or credit and accessible financial services are important for a developing country like India. Indian industries and the general public depend upon the banking sector.
• US economy implemented TARP after the 2008 financial crisis. This change helped the recovery of the economy.
• The money locked in by the bad loans are released, and this help for free capital.
A bad bank is not about the transfer of bad loans, but it is for the recovery of bad loans. The pandemic crisis creates stress about mobilizing the capital for the banks. The fair price model also creates political challenges. The price of the non-performing-loan is not a fixed one, and it creates political challenges. The lending of public sector banks suffer because of the bad loans, and the structural changes help for the speedy recovery.