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.