Purchase and assumption
Also called: P&A · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Purchase and assumption (P&A) is a way to resolve a failing bank, meaning to deal with it before it collapses in a disorderly way. A healthy bank "purchases" the failed bank's good assets, such as sound loans, and "assumes", or takes over, its deposits. The bad assets are not worth enough to match the deposits, so someone has to pay the gap. This is often the deposit insurer, or a resolution fund. Under the least-cost rule, the insurer should pay for a P&A only if it costs less than paying every insured depositor directly. P&A matters because depositors move to a sound bank and keep using their accounts, so they do not wait months for a payout.
Example
Say a failing bank owes depositors Rs 1,000 crore, but its good loans are worth only Rs 800 crore. A healthy bank takes over all Rs 1,000 crore of deposits and the Rs 800 crore of good loans. The deposit insurer pays the remaining Rs 200 crore. This is cheaper than paying out every depositor in full and then trying to recover money from the bad loans. In India, the closest case is Lakshmi Vilas Bank's merger into DBS India (2020), where depositors' accounts moved to a stronger bank.
Don't confuse with
- Deposit insurance payout: here the insurer pays depositors directly, up to the limit (Rs 5 lakh per depositor per bank in India since 2020), and the bank is closed. In a P&A, the accounts themselves move to another bank.
- Bail-in: losses fall on the failed bank's own creditors and sometimes its depositors. In a P&A, the gap is paid by the insurer or a resolution fund, and depositors are not asked to take a loss.