Daily Current Affairs Article 21th January 2021: The idea of setting up a bad bank to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted, is back on the table.
A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
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Technically, a bad bank is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.
