EVALUATING THE NEED FOR BAD BANKS AMID EXISTING ARCS

AUTHOR – MS. KAJAL KAMALKISHORE BANG, STUDENT AT JINDAL GLOBAL LAW SCHOOL.

BEST CITATION – MS. KAJAL KAMALKISHORE BANG, EVALUATING THE NEED FOR BAD BANKS AMID EXISTING ARCS, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 4 (4) OF 2024, PG. 1012-1019, APIS – 3920 – 0001 & ISSN – 2583-2344.

ABSTRACT

This paper critically examines the need and effectiveness of establishing new government-backed bad banks in India, especially in the context of the existing private-sector-funded Asset Reconstruction Companies (ARCs). The surge in Non-Performing Assets (NPAs) in Indian banks underscores the urgency of finding effective solutions to financial instability. While bad banks might seem like a viable solution to current gaps in NPA management, it is important to note that this concept is not new to India’s asset management landscape. The study finds that ARCs already play a significant role in asset recovery, but they are hindered by challenges such as limited turnaround capacity, insufficient capital, and reliance on private funding, which diminishes their effectiveness. Although bad banks could help address some of these challenges, such as providing government support and facilitating the acquisition of larger NPAs, they do not tackle the root causes of the issues within the banking system. Concerns arise regarding accountability, the use of taxpayer funds, and the potential complacency of commercial banks, which could weaken lending standards. Without strong oversight, including mandatory forensic audits, the creation of bad banks could repeat past mistakes and perpetuate systemic inefficiencies. Therefore, this paper advocates for strengthening the capabilities of existing ARCs rather than creating new institutions. The study suggests exploring alternative solutions focused on comprehensive auditing, risk management, and operational efficiency. By addressing the core causes of NPAs and fostering a culture of accountability and proactive credit assessment, India can achieve long-term financial stability without burdening taxpayers or compromising the integrity of its banking system.