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What is the purpose of setting up of National Asset Reconstruction Company Limited (NARCL) and why is it termed as Bad Bank? Discuss the factors that are essential for effective functioning of Asset Reconstruction Company.

Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

5. What is the purpose of setting up of National Asset Reconstruction Company Limited (NARCL) and why is it termed as Bad Bank? Discuss the factors that are essential for effective functioning of Asset Reconstruction Company. (250 words)

Difficulty level: Easy

Reference: moneycontrol.com

Why the question:

RBI grants licence to National Asset Reconstruction Company.

Key Demand of the question: 

To discuss the need & nature of Asset Reconstruction Company and factors that will make it effective.

Directive word: 

Discuss – This is an all-encompassing directive – you must debate on paper by going through the details of the issues concerned by examining each one of them. You must give reasons for both for and against arguments.

Structure of the answer:

Introduction: 

Begin by mentioning the status of bad debts with the financial institutions and the need to separate out such debts to boost the overall performance of the financial institutions.

Body:

First, describe the structuring of the NARCL and also mention its mandate that makes it a bad bank.

Next, highlight the impact of bad debts being spread over various financial institutions

Next, suggest need of right team with the right incentive structure and an innovative approach in handling assets for an effective performance of NARC.

Conclusion:

Conclude by saying that global best practices coupled with local realities and needs, must be emulated for an effective resolution of bad debts.