- Statement (i) is incorrect: A bad bank is not necessarily an insolvent bank itself; it is a tool used to deal with the insolvency risk arising from bad loans held by other banks. - Statement (ii) is incorrect: A bad bank is not a bank that has become bankrupt. It is a mechanism to prevent other banks from becoming bankrupt due to excessive bad loans. - Statement (iii) is incorrect: This describes a situation that might lead to the creation or use of a bad bank, but it is not the definition of a bad bank itself. - Statement (iv) is correct: This statement accurately describes the primary function of a bad bank – acquiring bad loans and illiquid assets from struggling financial institutions.
Which of the following is/are correct about a Bad Bank? (i) A bank that is insolvent (ii) A bank that has become bankrupt (iii) A bank whose NPAs have crossed the tolerable limit (iv) A bank set up to buy bad loans and other illiquid holdings of another financial institution Select the correct answer using the codes given below.
Asked in APSC CCE Prelims Exam 2023 · Topic: Money & Banking (Banking Sector Reforms: Basel Norms, Asset Quality Review (AQR), and NPA Management)
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