Economics • Banking & FinanceEasy
What does the term 'Bad Bank' refer to in the context of resolving non-performing assets (NPAs) in India?
A. A financial institution set up to buy and resolve bad loans and stressed assets from commercial banks✓ Correct Answer
B. An unauthorized underground banking network operating without regulatory oversight
C. A cooperative bank facing mandatory liquidation by the central bank
D. A commercial bank that fails to maintain its Statutory Liquidity Ratio
💡 Solution & Explanation
A bad bank functions as an asset management company that acquires non-performing loans and stressed assets from commercial banking balance sheets to revive credit flow within the financial sector. This specialized mechanism isolates toxic debts, allowing traditional banks to resume normal lending operations without balance sheet distress. Alternative concepts like underground networks or liquidated cooperatives do not describe institutional bad banks. Banking sector reforms are staple topics for economics examinations.
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