Subramanian said currently 28 ARCs are functional and their job is to take bad loans from banks and act as bad bank. (File photo: IE)

Chief Economic Advisor Krishnamurthy Subramanian on Thursday said setting up a bad bank may not be a potent option to address the non-performing asset woes in the banking sector.

Subramanian said when a bank sells bad loans, it has to take a haircut because when Rs 100 goes bad, the actual amount that can be expected is lower than 100 and that leads to haircut.

“So when the bank has to sell that loan to ARC (asset reconstruction company) or a new institution that is created, in that case it has to take haircut. When it takes haircut that will impact the P&L (profit and loss). And that is one of the key aspect affecting the selling of loans.

“So till that particular aspect is not addressed creating a new structure may not be as potent in addressing the problem”, Subramanian said. Currently, banks sell their bad loans to ARCs as per the prudent norms of the Reserve Bank of India.

Subramanian said currently 28 ARCs are functional and their job is to take bad loans from banks and act as bad bank.

The idea of bad bank was also discussed in the meeting of the financial sector regulators FSDC earlier this month.

Setting up of a bad bank to deal with the problem of mounting NPAs is not a good idea and will not yield desired results unless some key aspects like transparency and recovery rate are addressed, eminent banker Uday Kotak said earlier this week.

The government was toying with the idea of creating a bad bank in 2016. Even the Economic Survey 2017 had proposed this idea, suggesting the creation of a bad bank called Public Sector Asset Rehabilitation Agency (PARA) to help tide over the problem of stressed assets.