Introduction

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Role of RBI in Banking Sector Reforms

1. Regulatory and Supervisory Framework
   • Enacted and enforced the Banking Regulation Act, 1949 and subsequent amendments.
   • Introduced prudential norms on income recognition, asset classification, and provisioning (IRACP) to improve transparency.
2. Financial Sector Liberalisation (Post-1991)
   • Implemented Narasimham Committee recommendations, such as reduction of statutory pre-emption (CRR, SLR), deregulation of interest rates, and promotion of competition by licensing new private banks.
3. Monetary Policy Framework
   • Shifted from credit allocation to inflation targeting regime (2016), managed by the Monetary Policy Committee (MPC).
   • Introduced modern instruments: Liquidity Adjustment Facility (LAF), Marginal Standing Facility (MSF), and Market Stabilisation Scheme (MSS).
4. Resolution of Stressed Assets
   • Launched Prompt Corrective Action (PCA) framework to restore weak banks.
   • Coordinated with the government on Insolvency and Bankruptcy Code (IBC), 2016 for faster resolution of NPAs.
5. Strengthening Capital Adequacy
   • Adopted Basel I, II, and III norms for capital adequacy and risk management.
   • Mandated Capital to Risk-Weighted Assets Ratio (CRAR) and Liquidity Coverage Ratio (LCR).
6. Financial Inclusion and Digitalisation
   • Launched priority sector lending guidelines, Lead Bank Scheme, and Financial Inclusion Plans.
   • Promoted Jan Dhan–Aadhaar–Mobile (JAM) trinity, UPI, and licensing of Payment Banks and Small Finance Banks.

Impact of Reforms

1. On Commercial Banks
   • Improved efficiency, profitability, and global competitiveness.
   • Reduced reliance on directed lending; more autonomy in lending and interest rate decisions.
   • Better risk management and accountability due to prudential norms and Basel compliance.
   • Pressures of recapitalisation and consolidation to meet capital adequacy requirements.
2. On the Broader Economy
   • Enhanced financial stability and reduced systemic risks.
   • Expansion of credit to priority sectors supported inclusive growth.
   • Development of money market, forex market, and government securities market aided economic liberalisation.
   • Boost to digital economy and transparency in financial transactions.
   • Improved investor confidence and integration with global financial system.

Conclusion

Introduction

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Rationale Behind the Proposal

• The Indian banking system, especially public sector banks, has been burdened by high NPAs, largely due to economic slowdown, corporate defaults, and the twin balance sheet problem. Traditional recovery mechanisms such as SARFAESI Act, Insolvency and Bankruptcy Code (IBC), and Debt Recovery Tribunals faced delays and inefficiencies. The bad bank was proposed as a centralized mechanism to acquire large-value stressed loans, aggregate them, and resolve them professionally through asset reconstruction and asset management companies.

Merits of a Bad Bank

• The creation of NARCL has several advantages. It frees commercial banks from the burden of toxic assets, improving their balance sheets and enabling them to focus on productive lending, which is critical for economic growth. By consolidating NPAs under one institution, the resolution process becomes more specialized, coordinated, and efficient, avoiding duplication of efforts across multiple banks. The mechanism also allows banks to receive part of the recovery upfront, improving their liquidity position. Further, international experiences from countries such as the USA (after the 2008 crisis) and Ireland suggest that bad banks can be effective tools in restoring financial stability when implemented with strong governance.

Limitations and Concerns

• However, the bad bank is not a silver bullet. Critics argue that it merely shifts bad assets from one institution to another, without addressing the root causes of NPAs such as poor credit appraisal, political interference, and crony capitalism. There is also the risk of moral hazard, as banks may become lax in lending practices, expecting future bailouts through bad banks. Recovery of stressed assets depends on market conditions and legal hurdles, which cannot be solved by mere transfer of loans. Additionally, financing and recapitalization of the bad bank involve public funds, raising concerns of fiscal burden and potential misuse.

Way Forward

• For the bad bank to succeed, it must operate with transparency, professional management, and accountability. Asset valuation must be realistic to avoid losses to taxpayers, and resolution should be time-bound. Parallel reforms such as strengthening of IBC, corporate governance in banks, and stricter credit appraisal mechanisms are necessary to prevent fresh accumulation of NPAs. Long-term solutions lie in structural banking reforms rather than one-time clean-up exercises.

Conclusion