The sensible thing to do is for the State-owned banks to come together and jointly set up a bad bank, to which the bad loans on the banks’ books can be offloaded and resolved at leisure. Why set up a bad bank? It can offer the patient capital needed to resolve bad loans optimally, and the gains made over the cost of acquiring the bad loans would accrue to the banks themselves. Unless the resolution process in the new bad bank is crookedly designed to sell off assets cheap, it would recoup a fair bit of the value lost by the banks when they transfer their assets to the bad bank in the first place, and these gains would be passed on to the PSBs that own the bad bank. Such double layers of reassurance would be afforded only by a new bad bank, not an asset management entity.

Source: Economic Times December 28, 2020 18:45 UTC