The bad bank is a differentiated bank, dealing only with NPAs. No, it\u2019s not a bank that is evil.\\ India\u2019s bad loan problem has become alarming. The stress sits at Rs.14 lakh crore; meaning there is now no certainty of receiving repayment of that amount. So even if the account is not a non-performing asset (NPA), banks have to make higher provisions for the sick days ahead. According to sources, bad loans in the Indian banking system have almost doubled in the past year. The impact of stressed assets is being felt far beyond the banking sector. The banks, especially PSBs, are finding it difficult to raise funds and this is hurting their ability to lend to the commercial industry. Thus, due to high-pitched rise in NPA, talks of setting up a \u2018bad\u2019 bank have gained momentum. What is \u2018Bad-bank\u2019 A bad-bank is a company that takes up all the NPAs of a financial institution at a price that is below their book value. It then works to recover and turnaround the assets through professional management, sale or restructuring. The sellers of these bad loans can clear their balance sheets and retain only the good holdings after writing-off the sick ones. For example, Bank SMP has lent to a number of borrowers who cannot repay. The bad loans sitting on the bank\u2019s balance sheet are jeopardizing Bank SMP\u2019s ability to stay in business. The bank decides to create a wholly owned subsidiary to buy the NPAs The bad-bank can either hold the NPA loans or hope borrowers start paying on them, or it can sell it to other investors. The primary benefit of forming a bad bank is asset monetisation. Bad assets will stay in the \u2018risky\u2019 category, while the good one stays in the \u2018other\u2019 group, saving them from mixing. Now, investors are sure of its financial health and could pour in more money. Whose brainchild was it? Sweden, Finland and Ireland have all used bad banks to help end financial crises. Even though the bad loans do not go away, getting the bad loans off a bank\u2019s balance sheet can give the bank additional time to repair. A prominent example of a bad bank is Portugal\u2019s Novo Banco. Novo Banco was established by the Portuguese government in August 2014, as part of a rescue of the failing Banco Espirito Santo BES. BES was broken into a \u201cgood bank,\u201d comprising its good assets; and a bad bank (Novo Banco), containing all of the hard to recover loans. One more example is Grant Street National Bank. This institution was created in 1988 to house the bad assets of Mellon Bank. The idea of forming a \u2018bad bank\u2019 in India gained currency in January 2017. RBI deputy governor Viral Acharya recently suggested two models to solve the problem of stressed assets. The first, Private Asset Management Company (PAMC), is said to be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness. Some of the industries which this model could address are telecom and textiles. The second model is the National Asset Management Company (NAMC), which would be necessary for sectors where the problem is both excess capacity and economically unviable assets in short- to medium-term. eg. power sector. Bad Bank vs. Bad Loans Even though the initiative of creating a \u2018bad bank\u2019 is back on the table, it is not a good idea under the present circumstances. It is a partial solution because it deals with the symptom and not the disease. Far from a bad bank, India currently needs an answer to bad lending. We need to change the way loans are given and monitored inherently. India needs to rid its government-owned banks from political interference and patronage. Once that is done, India needs to hold the lenders accountable for their actions. The government must punish corporates that had obtained loans through fraudulent means. Only certain bad debts should go to a bad bank. Moreover, the new Insolvency and Bankruptcy Code is already operational, which is also a tool to resolve bad loans. In fact, we already see a resolution in some significant cases. The bad-bank structure could help banks park their money to separate agency to find a solution in a long time. Banks feel the assets having future demand-supply issue face liquidation under the IBC, a problem that can be solved under the bad- bank. Future Now A bad-bank should be linked to the future of banking sector. If implemented, this may aid the 19 public sector banks of the total 21, which have made losses worth nearly Rs 60,000 crore during January to March this year. Policymakers appear to give an impression that it is single shot solution to solve the problem. The government has to implement bold decisions and strategies in the case of a bad bank story. Yes, it will be a unique challenge. It is a fact that the existing Asset Reconstruction Companies whose functions are primarily confined to recovering stressed loans through liquidation of an asset cannot address the problem. For such a bank to succeed, lenders have to value the sourced loans realistically. Banks will have to take hefty haircuts or discounts while selling the investments, even at the cost of their profitability. Further, equity may be acquired from owners and private investors. In contrast if it is going to be business as usual in the public sector banks including knotting their pens by the thread, even after setting up a bad bank, we will need a bad bank every five years. The statement \u2018Bankers are people that help you with problems you would not have had without them\u2019 will be alive forever.