Union Budget 2021: Bad Bank Is Finally Here! FM Addresses Issue of Toxic Assets, LIC IPO To Be Launched In FY22

Union Budget 2021: The announcement to set up a bad bank was among the major expectations from the budget this year as the banking sector is expecting a second wave of bad loan spike once regulatory forbearance to deal with the impact of Covid-19 is withdrawn.

In a slew of measures announced to address the banking sector, finance Minister Nirmala Sitharaman on Monday said a bad bank to effectively deal with non-performing assets of the financial sector will be set up. This particular announcement was among the major expectations from the budget this year. Also Read: Budget 2021: FM Announces Voluntary Scrapping Policy; 20-Yr-Old Private Vehicles To Undergo Fitness Test

Bad bank refers to a financial institution which takes over bad assets of lenders and undertakes resolution. Lenders have been making a case for setting up a bad bank to ease out pressure of bad loans on them in these difficult times. FM has announced setting up of an institution to address the stressed assets in the banking system through an ARC model. It is much-awaited news for the banking sector with the sector already expecting a second wave of bad loan spike once regulatory forbearance to deal with the impact of Covid-19 is withdrawn.

Budget 2021: Here's How You Can Download A PDF Copy Of The Documents

However, as per the Bloomberg report, most banks have reported a smaller percentage of bad loans on their books in the last quarter. It has been possible because the Supreme Court barred banks from classifying any loans as non-performing assets from the start of September.

A bad bank could help shift the toxic assets to a separate entity so that banks can focus on fresh business. Chief Economic Adviser K V Subramania,  the lead author of the Economic Survey 2020-21, has made a case for carrying out a fresh asset quality review (AQR) once the ongoing forbearances related to COVID-19 come to an end. Any AQR exercise, the Survey said, must be accompanied by a round of bank recapitalisation. Once the forbearance policy was discontinued in 2015, the RBI conducted an AQR to know the exact amount of bad loans present in the banking system.

As a result, banks’ disclosed NPAs increased significantly from 2014-15 to 2015-16. In the absence of forbearance, banks preferred disclosing NPAs to the restructuring of loans.

Meanwhile, the FM has announced two PSBs and one general insurance company to be divested, legislations amendments to be introduced in this session. The much-awaited IPO of LIC to come in 2021-22, said FM. The government will introduce the initial public offer (IPO) of Life Insurance Corporation Ltd. (LIC) in 2022 and will complete the divestments of Air India by 2022.