DMPQ:What is bad bank? Why there is need of Bad bank?

Bad bank or PARA (Public Sector Asset Rehabilitation Agency) was proposed in Economic Survey 2016-17. Bad Bank is an institution which specializes in loan resolution process, so that banking system is free to focus on core banking solutions.

Need for PARA

According to Economic Survey, need for PARA arises because:

  • Early resolution so that Funds for creation of new credit can be used
  • Wilful Defaulters cannot escape because of non-coordination in Joint Lenders’ Forum
  • Large Defaulters comprise more value of NPAs, as 50 top defaulters account for 71% of NPAs. Therefore, PARA, with focus on top cases can lead to faster recovery
  • PARA with its mandate on time-bound resolution, may be better equipped with decision making capabilities, in comparison to bank management, who feared CVC and CAG enquiry on debt write-offs.
  • ARCs have not been successful, as they have bought only 5% of NPAs, according to ES 2016-17
  • Without PARA, banks have resorted to refinancing, which leads to delaying the cases. This further leads to lack of credit and investment in the economy.

PARA helps to enhance investment in banks and improves credit ratings, so that Indian firms have access to cheap global credit.

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