In the budget 2021 Finance ministry has proposed to bring the bad loan bank to the table … Through initial read of the articles published about it , it seems that the concept of SPV has been introduced to our country.
At once it seems that it would be beneficial for the banking sector as now they need not have to preserve their capital for the bad loans as they can straight away sold those to the alternative investment fund (AIF) , hence will remain with greater capital to provide loans and will be more profitable … But on the flip it reminds of the housing bubble crises suffered by US due to the moral hazard performed by the banks and the default made by the loan takers.. I am just curious to know the potential impact of such decision planned by the GOI .
I think one major reason why the bad bank policy cannot lead to a crisis such as 07-08 is that this is a one time provision wherein the current bad loans of the banks are transferred to the bad bank but the future loans which the banks write can not be transferred to the bad bank even if it becomes an NPA.
Thus, moral hazard element is removed.
Hope this helps!
Thanks