CAPF AC 2022 Q97: Indian Economy – Banking & Financial Sector
- (a) an asset reconstruction company
- (b) an asset management company
- (c) a bank with huge 'nonperforming assets'
- (d) a bank that has become insolvent
Answer: (a) an asset reconstruction company
Explanation
Bad bank
How to think: a bad bank is not a bank that has gone bad.
It is a special company that buys the bad loans of ordinary banks.
The banks get clean books, and the bad bank tries to recover the money.
Such a company is an asset reconstruction company (ARC).
| Body | Role |
|---|---|
| National Asset Reconstruction Company Limited (NARCL) | The bad bank; buys stressed loans from banks |
| India Debt Resolution Company Limited (IDRCL) | Manages and sells those assets |
Key facts: the idea was announced in the Budget of 2021-22.
NARCL pays 15% in cash and 85% in security receipts.
The government guaranteed the receipts up to ₹30,600 crore.
Public sector banks own the majority of NARCL.
Answer: (a) an asset reconstruction company.
Why each option is right or wrong
- (a) CORRECT. A bad bank is an asset reconstruction company that takes over bad loans.
- (b) Incorrect. An asset management company runs mutual funds.
- (c) Incorrect. A bank with heavy NPAs is a weak bank, not a bad bank in this sense.
- (d) Incorrect. An insolvent bank is a failed bank, a different thing.
Key point
Bad bank = NARCL (asset reconstruction company) + IDRCL (resolution). Budget 2021-22. 15% cash, 85% security receipts, guarantee of ₹30,600 crore. NPA: loan overdue for more than 90 days. ARCs work under the SARFAESI Act, 2002.
Remember
Bad bank = NARCL, an asset reconstruction company.
Common mistakes
- Taking the name literally as a bank with many bad loans.
- Mixing up asset reconstruction (bad loans) with asset management (mutual funds).
- Thinking a bad bank accepts deposits from the public.
Exam tip
Educated guess: options (c) and (d) are the literal meanings a careless reader would pick, so they are the traps. The news was about a new company to buy bad loans.
Sources
- Press Information Bureau, Ministry of Finance — Cabinet approves Central Government guarantee to back Security Receipts issued by NARCL (16 September 2021)
- Union Budget 2021-22 — Budget Speech, paragraph on Asset Reconstruction Company and Asset Management Company