With reference to Indian economy, the term 'bad bank', frequently mentioned in news, refers to

Correct — A, an asset reconstruction company. In Indian usage 'bad bank' names the National Asset Reconstruction Company Limited, announced in the Union Budget for 2021-22 and set up to buy stressed loans off bank balance sheets. The Budget speech put it as 'an Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization'. The entity that acquires the loans is the asset reconstruction company; that is what the term points to.

• (b)an asset management company — The asset management company is the second half of the structure, not the bad bank itself. India Debt Resolution Company Limited was set up to manage and resolve the acquired assets, while the acquisition and the aggregation sit with the reconstruction company.
• (c)a bank with huge 'nonperforming assets' — This is the tempting reading — a bank loaded with bad loans is not a bad bank in the technical sense. The term names the vehicle built to take those loans away, so that the lender's own books are cleaned.
• (d)a bank that has become insolvent — An insolvent bank is dealt with through amalgamation, resolution or a Reserve Bank moratorium. It has nothing to do with the aggregator vehicle the term describes.

A bad bank is a vehicle that buys non-performing loans from lenders at an agreed price, freeing the lender to resume ordinary business while the vehicle works on recovery. India's version is two-tiered: the reconstruction company acquires the loan, largely against security receipts backed by a government guarantee, and a separate resolution company manages and disposes of the underlying asset.

Aggregation is the point of the design. A stressed corporate loan is typically spread across many lenders whose interests diverge, and a resolution stalls because none of them can move alone. Consolidating the whole exposure in one holder lets a single decision-maker take the write-down, which is what the two-company structure was built to achieve.

• The structure was announced in the Union Budget for 2021-22.
• The acquiring entity is an asset reconstruction company registered with the Reserve Bank under the SARFAESI Act, 2002.
• India Debt Resolution Company Limited is the companion asset management arm.
• Acquisitions are paid for partly in cash and partly in security receipts carrying a government guarantee.

• Reading 'bad bank' as a bank that is in bad shape; it is the vehicle that buys the bad loans.
• Mixing up the reconstruction company with the resolution or asset management arm beside it.

As a 'term refers to' item, or through the difference between an ARC and the resolution company.

No directly related past PYQ was found.

• practice — not a real PYQ

  Asset reconstruction companies in India are registered and regulated under which law?

  • (a)The Companies Act, 2013
  • (b)The SARFAESI Act, 2002
  • (c)The Banking Regulation Act, 1949
  • (d)The Insolvency and Bankruptcy Code, 2016

  Answer(b) The SARFAESI Act, 2002 — registration is with the Reserve Bank of India under that Act.

• practice — not a real PYQ

  Security receipts issued by an asset reconstruction company represent

  • (a)equity shares in the borrowing company
  • (b)a claim on the recoveries from the acquired stressed asset
  • (c)a government bond
  • (d)a fixed deposit with the selling bank

  Answer(b) a claim on the recoveries from the acquired stressed asset — they are redeemed as the asset is resolved.