What’s a Bad Bank ? – Why Markets Go Gang-Ho !

Finance minster Nirmala Sithraman on Monday, while presenting the Union Budget for 2021-21, announced that the government will set up an asset reconstruction company (ARC) and an asset management company (AMC) to house stressed assets currently in book of Indian banks.

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India will set up a company to manage bad debt for banks, which is expected to reach record levels this year, threatening financial stability in the world’s second-most populous nation. The firm will hold problem loans for banks, which can then be sold on to investors at a reduced price, according to plans outlined by Finance Minister Nirmala Sitharaman in a budget speech on Monday. An index of bank shares surged the most since May. Indian lenders — like global peers — are struggling with the economic fallout of the coronavirus, which has triggered an unprecedented economic slump hurting borrowers’ ability to repay debts.

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Banks were already weakened by a two-year-old shadow lending crisis and are now struggling with one of the worst bad-loan ratios among major nations. The Reserve Bank of India expects non-performing assets will rise to 13.5 per cent of total advances by the end of September from 7.5 per cent a year ago, according to its semiannual Financial Stability Report published last month. If the number holds through the fiscal year ending March 2022, it would be the worst since 1999 and one of the highest levels among major economies.

Shares of Indian lenders surged with the main banking barometer climbing as much as 6.5 per cent after the announcement of the stressed asset management company.

Separately, the government plans to pump 200 billion rupees ($2.7 billion) into state-run lenders from April 1, to boost lending in a nation that’s set for its worst contraction since at least 1952, Sitharaman said. These measures follow a 200 billion rupee budgeted infusion in the year ending March 31, but falls short of estimates from ICRA Ltd., the local ratings arm of Moody’s Investors Service Ltd., which expected infusion of 430 billion rupees.


As per the budget proposals, the government plans to start the process of privatisation for two more public sector banks, other than IDBI Bank, and two insurance companies in fiscal 2021-22. That apart, Life Insurance Corporation of India (LIC) will go for an initial public offering (IPO) in FY22 as well. A major negative, according to experts, which was missing from the budget proposals was the imposition of Covid-19 cess and measures to hike or introduce new taxes for capital market-related activity.

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