Explanation:

Recently, the Indian Banks Association (IBA) submitted a proposal for setting up a bad bank to the finance ministry and the RBI, proposing equity contribution from the government and the banks.

• A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions, which clears their balance sheet.
• A bad bank structure may also assume the risky assets of a group of financial institutions, instead of a single bank.
• Bad banks are typically set up in times of crisis when long-standing financial institutions are trying to recuperate their reputations and wallets.
• Banks that become insolvent as a result of the process can be recapitalized, nationalized, or liquidated. Hence only statement 2nd is correct.