Lessons from China on bad banks to solve NPAs

After the Asian financial crisis, China set up dedicated bad banks for each of its big four state-owned commercial banks. These bad banks were meant to acquire non-performing loans (NPLs) from those banks and resolve them within 10 years.

In 2009, their tenure was extended indefinitely. In 2012, China permitted the establishment of one local bad bank per province. In 2016, two local bad banks were allowed per province. By the end of 2019, the country had 59 local bad banks.

However researchers have found that the Chinese bad banks effectively help conceal NPLs. 

As India gets ready to operationalize a new bad bank, the National Asset Reconstruction Company Ltd. (NARCL), we need to learn the following important lessons from the bad experience of the Chinese:

  • A centralized bad bank has a temporary purpose, and need not exist in perpetuity.

  • Transferring NPLs to a bad bank is not a solution in itself. There must be a clear resolution strategy and the bad bank must have a specific, narrow mandate with clearly defined goals. 
  • In a steady state, the resolution of bad loans should happen through a market mechanism and not through a multitude of bad banks. 

India should limit the mandate and tenure of NARCL, while facilitating market-based mechanisms for bad loan resolution in a steady state.


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