Bad Banks
- A bad bank is a financial entity set up to buy Non-Performing Assets (NPAs), or Bad Loans, from banks.
- The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints.
- After the purchase of a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in purchasing it.
- A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it paid to acquire the loan from a commercial bank.
- However, generating profits is usually not the primary purpose of a bad bank – the objective is to ease the burden on banks, of holding a large pile of stressed assets, and to get them to lend more actively.