A “bad bank,” also known as an asset-building business, usually buys non-performing loans at agreed prices from the banks involved. The lender then liquidates or sells the assets provided as collateral for the loan. The proceeds from the sales help the bank recover some of the money it lent to the company.
This is not the first time India has experienced a bad debt crisis or started a “bad bank”. In fact, there have been 28 such businesses in the last 20 years, all privately owned, but the recovery was disappointing. This time, the government has set up two companies. One is to acquire bad debts and become state-owned. Other companies that are partially privately owned try to sell their assets.
The government pays the difference between the expected value of a commercial bank’s assets and what the “bad bank” can get from the sale of the assets.
We lost money and then we lost our son
It’s not easy.
On the one hand, banks need to agree on a valuation.
“Let’s say you have 20 creditors in your business. Everyone has to agree on many things. What is the value of a loan today? How much is the borrower’s property worth? Anil Gupta, Vice President of Financial Sector Ratings at ICRA, an investment and credit rating agency, said:
“Banks can often lend, but not with bad repayments and loan repayments.”
This is where the second company comes in. Bid on endangered corporate assets, primarily land, plants, machinery, and some of them at scrap prices. About 80% of non-performing loans are in the steel, aerospace, mining, road, energy and telecommunications sectors, with half a dozen industries.
On May 5, 2021, security guards passed the entrance to the headquarters of the Reserve Bank of India (RBI) in Mumbai. BEELDBRON, AFP
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Among the branches of 12 large standard companies called “dirty dozens” are companies that manufacture steel, textiles, infrastructure, and ships. Distribute power. Develop real estate and build infrastructure. Some of its assets need to be sold, which will be a challenge in slower economies. In the long run, India needs to clean up its banking operations significantly. India’s credit ratio to GDP remains less than 60%, but the bank has the highest lending in the world.
Loans began to build up between 2006 and 2008, when growth was strong and loans were easy. Due to the global financial crisis of 2007-2008 and slow growth, India was relatively unharmed and its investment enthusiasm remained undiminished.