How India Finally Got Around to Starting a ‘Bad Bank’

India has unveiled a plan to set up a bad bank, its latest attempt to tackle the mountain of defaulted debt that threatens to cripple its financial system. With soured assets pegged at a more than two-decade high, the move is aimed at reviving confidence in banks at a time when the virus-stricken economy is emerging from its first contraction in decades. But the problems predate the pandemic: a lingering liquidity crisis has claimed several shadow lenders, triggered India’s largest bank failure and forced the country’s largest fund freeze. Past efforts at fixes have had limited success.

It’s a place where a struggling financial institution can put assets it wants off its own books to eventually sell or unwind. Often it’s made up of businesses or holdings that are dragging the bank down, such as risky and illiquid derivatives or delinquent loans. But the nickname can be misleading, as everything inherited isn’t necessarily bad. It can also include unwanted assets that are no longer core to a firm’s strategy. Many global lenders set up such divisions in-house after the 2008 financial crisis, some with taxpayer assistance.