Economy / Banking System In India / Public Sector Asset Rehabilitation Agency (PARA)
Public Sector Asset Rehabilitation Agency (PARA)
Introduction: The concept of a "bad bank" or a dedicated institution like the Public Sector Asset Rehabilitation Agency (PARA) has been proposed to address the issue of non-performing assets (NPAs) in Public Sector Banks (PSBs). The Economic Survey 2016-2017 recommended the establishment of PARA to act as a special purpose vehicle (SPV) to address the NPA problem.
Key Points:
- Purpose of PARA:
- PARA serves as an SPV with the specific goal of resolving the NPA problem in PSBs.
- The agency is designed to raise funds by issuing government bonds, which will be used to purchase significant bad loans from PSBs.
- Advantages of PARA:
- Relieving PSBs of NPAs: PARA aims to relieve PSBs of the burden of holding significant NPAs.
- Faster Resolution: Consolidating bad loans under PARA allows for a quicker resolution compared to individual bank settlements.
- Better Bargaining Power: Having a single entity like PARA as the buyer provides an advantage in negotiating terms for the purchase of bad loans.
- P.J. Nayak Committee Recommendations:
- The P.J. Nayak Committee, set up by the RBI, provided governance-related recommendations for banks.
- Recommendations included reducing the government's stake in PSBs to below 50%, professionalizing board appointments, and introducing fixed terms for top management positions.
- Union Budget 2021-22 and Bad Bank:
- The Union Budget 2021-22 announced the establishment of a bad bank to address stressed assets in banks.
- The bad bank would operate through an Asset Reconstruction Company (ARC) model.
- Banks can transfer distressed assets to this entity at a discounted rate, and professionals will work on resolutions, enabling originating banks to focus on new business.
- COVID-19 Impact and Bad Bank:
- The economic challenges posed by COVID-19 exacerbated the NPA problem.
- Establishing a bad bank is seen as a strategy to free up banks from the burden of bad loans, facilitating credit growth.
- Project Sashakt (2018):
- In 2018, the government introduced "Project Sashakt," a plan for PSBs that included a five-point strategy for bad loan resolution.
- The plan involved setting up an independent Asset Management Company (AMC) aligned with the Insolvency and Bankruptcy Code (IBC) to focus on asset turnaround, job creation, and protection.
The establishment of PARA or a bad bank reflects a strategic approach to efficiently manage and resolve the challenges posed by NPAs in PSBs, aiming for a healthier financial sector and economic growth.
