New Delhi | Jagran Business Desk: The banking sector has been hit hard by the COVID-19 pandemic and the economic slowdown caused by it 2020. While the Reserve Bank of India (RBI) has taken various steps to revive this all crucial sector, the central government is mulling creating a 'bad bank' for the banking sector.

Several experts, including International Monetary Fund's (IMF) Gita Gopinath, have also endorsed for the 'bad bank' idea and feel that it may help the Centre revive the financial institutions of the country.

"The Bad Bank is certainly a reasonable idea but right now I would encourage the banks and the NBFCs to raise capital given how easy the financial conditions are at this point," Gopinath said while speaking to News18 in an interview.

What is a bad bank?

A bad bank acts as an aggregator of all stressed assets in the system and aims to resolve the issue leaving the banks to focus on the business at hand. A financial institution with non-performing assets (NPAs) can sell its holdings to a bad bank at a market price that will help them clear their balance sheet.

However, several experts feel that excess dependence on capital infusion is not a good long term plan for public sector banks (PSBs). Notably, PSB recapitalisation only of Rs 20,000 crore has been finalised for the current fiscal.

"Banks are an important area which we need to correct. We are looking at various options including the option that you have mentioned, it is still in the works so let us wait a bit, let us wait for a slightly longer period for us to unveil," said DEA Secretary Tarun Bajaj, as reported by DNA.

Meanwhile, the Centre in December last year had said that no amount of "government intervention will not be adequate to deal with the impact of novel coronavirus on the economy".

"We did not restrict the opportunities to any particular sector. This was needed to keep the industry floating. But no amount of intervention by the government will be adequate," Finance Minister Nirmala Sitharaman had said.

Posted By: Aalok Sensharma