A critique of the national asset reconstruction company, India’s bad bank
Indian Growth and Development Review
ISSN: 1753-8254
Article publication date: 28 September 2023
Issue publication date: 24 November 2023
Abstract
Purpose
This study aims to provide a critique of the institutional framework of the National Asset Reconstruction Company Limited (NARCL), India’s “bad bank.”
Design/methodology/approach
The approach followed is the development of an economic model of the gains to trade of an Asset Reconstruction Company.
Findings
Using an economic model, the paper shows that the rules of the game create an uneven playing field and are likely to lead to a systematic overpricing of nonperforming loans (NPLs). While this might increase the upfront cash received by the bank, it will come at the cost of higher liabilities for the government on account of the sovereign guarantee that is part of the proposed structure. The overpricing is also likely to act as an obstacle to efforts aimed at the revival of the distressed company. The NARCL could become a warehouse for NPLs subverting the objective of reconstruction.
Practical implications
Solutions to create a vibrant market for NPLs are proposed.
Originality/value
The Indian case is unique in the sense that a bad bank backed by the government has been introduced after almost two decades of the existence of similar entities in the private sector. To the best of the author’s knowledge, this paper is the first that addresses the design of such a market using economic modeling.
Keywords
Acknowledgements
The author acknowledges the insights developed in the course of being a member of the Committee to Review the Working of Asset Reconstruction Companies set up by the Reserve Bank of India. All opinions and errors are mine alone.
Citation
Prasad, R. (2023), "A critique of the national asset reconstruction company, India’s bad bank", Indian Growth and Development Review, Vol. 16 No. 3, pp. 217-229. https://doi.org/10.1108/IGDR-03-2023-0028
Publisher
:Emerald Publishing Limited
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