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Bad loans to be transferred to the Centre’s proposed bad bank.

Bad bank:

The Indian Banks’ Association (IBA) has begun identifying bad loans which can be transferred to the Centre’s proposed bad bank.

  • The IBA has written to banks asking them for a list of all bad loans worth Rs 500 crore and above to “identify the magnitude of the problem” and “get clarity over initial capital required for the entity”.
  • Finance Minister Nirmala Sitharaman had proposed setting up of a bad bank during her Union Budget 2021 speech on February 1.
  • She said the proposed entity would take over stressed loans from banks to sell to alternative investment funds (AIF).
  • A bad bank is a bank set up to buy bad loans and other illiquid holdings of another financial institution.
  • The entity holding significant nonperforming assets will sell these holdings to the bad bank at market price.
  • By transferring such assets to the bad bank, the original institution may clear its balance sheet—although it will still be forced to take write-downs.

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