InvestorQ : Is the bad bank announcement good or is it going to be a non-starter?
vaishnavi mhatre made post

Is the bad bank announcement good or is it going to be a non-starter?

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vidhya Laxmi answered.
3 months ago
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Firstly, I must say it is a good idea, so I would not go to the extent of calling it a non-starter. However, it will face a number of practical challenges. Firstly, the government guarantee is a net guarantee and not a case-by-case guarantee. It may hold up disbursal if the realization of other positive SR value assets are delayed. Hence it is possible that such guarantees may get caught up in liquidity issues. Also, the 5 year limit for guarantee may not always work.

The much bigger risk is that IDRCL may be induced to undervalue net assets of a company to be on the safer side in its relations with the government. This could defeat the purpose of the Bad Bank. The bigger challenge will be on the need to liquidate the company before the compensation is paid out. That may not be acceptable to most promoters who may want to run the business. Banks could use this as a bargaining chip to put pressure on borrowers.

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