India's growth is set to further accelerate on the back of the path-breaking plan to set up a 'Bad Bank', which is expected to absorb Rs 2 lakh crore worth of non-performing assets (NPA).

Accordingly, the process is expected to clean up banks' books and allow them to lend more freely. According to the Finance Ministry's Chief Economic Advisor Krishnamurthy Venkata Subramanian, the crucial reform measure in the sector will pave the way for a stronger banking sector.

In a conversation with IANS, he said the Budget proposal on 'Bad Bank' is really critical for the sound health of the financial sector as it would clean up the balance sheets of banks while also giving them the opportunity to raise additional capital from the market to step up lending.

The CEA said that with banks provisioning for bad assets rising to 85 per cent against 15 per cent for bad assets, a lot of hit that banks would have otherwise taken in these toxic assets have already been covered. With 'Bad Bank' coming into the picture, banks would not only get higher realization for bad assets but also free up their capital that could also help in augmenting capital by tapping market with share offering.

According to the RBI's biannual financial stability report , bank NPAs may rise to as high as 14.8 per cent in one year in case of a severe stress scenario, from 7.5 per cent as of September 2020 or close to Rs 7.5-8 lakh crore.

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