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Govt Outlines 'Bad Bank' Plan NARCL to Tackle NPA, Approves Guarantee of Rs 30,600 Cr

The Union Cabinet has cleared Govt guarantee up to Rs 30,600 crore for security receipts to be issued by NARCL or bad bank, says FM

The Union Cabinet has cleared Govt guarantee up to Rs 30,600 crore for security receipts to be issued by NARCL or bad bank, says FM

The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

Finance Minister Nirmala Sitharaman while addressing a press conference on Thursday announced that the Union Cabinet has approved the government’s guarantee for the National Asset Reconstruction Company. The idea of having a bad bank was first mooted by Nirmala Sitharaman in the Budget of 2020-2021. A ‘bad bank’ is a bank that buys the bad loans of other lenders and financial institutions to help clear their balance sheet.

“The Union Cabinet has cleared Govt guarantee up to Rs 30,600 crore for security receipts to be issued by NARCL or bad bank,. The move for setting up the NARCL is in line with 4Rs- recognition, resolution, recapitalisation, reforms,” Finance Minister Sitharaman said. She also added that the government has addressed issues in the banking sector that were staring us in the face in 2015.

The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. The government guarantee would be invoked if there is loss against the threshold value. Financial services secretary Debashish Panda said that the five-year limit will encourage banks to not drag the process. He said Rs 90,000 crore worth of NPAs will be transferred to the NARCL in the first phase.

Along with setting up NARCL, the government also announced the setting up of an Indian Debt Resolution Company Ltd. The mandate of the DRTs will be to manage the assets and raise institutional funding through alternate investment funds (AIFs).

“Banks have recovered over Rs 5 lakh crore in the last 6 financial years. Of 5.10 lakh crore, 3.1 lakh crore is recovered only from written off assets,” she said.

According to S&P Global Ratings, the stressed assets of Indian banks will remain elevated at 11-12 per cent in fiscal 2022. The agency expects non-performing loans plus restructured assets to increase to 11.5 per cent in the current fiscal from 8.7 per cent a year ago. It also expects banks’ performance to be affected in the first half of the fiscal due to the impact of the second wave.

“Now, the public sector banks are not waiting for the government to infuse capital but are raising funds through equity and debt markets; two out of 21 PSB were profitable. In 2020-21, only two public sector lenders reported a loss for the full year," she added.

“The announcement for Rs 30600 crore guarantees to backstop the proposed Security receipt to be issued under The NACRL framework is a significant step that will facilitate the Banks to take speedy decisions and the security provided will positively maintain the strength of Bank balance sheets. In the absence of the guarantee, the banks would have been required to make higher provisions. It is going to create a win-win situation for all stakeholders,” Jyoti Prakash Gadia, managing director, Resurgent India said.

Last month, the IBA moved an application to the Reserve Bank of India for a licence to set up a Rs 6,000-crore NARCL. The Cabinet nod was required as sovereign guarantee would be extended to security receipts issued by NARCL. In May this year, Indian Bank Association and the Confederation of Indian Industries requested the government to set up multiple bad banks to address the non-performing assets of state owned lenders.

“This is certainly a welcome move. A clear indication from the government that NARCL will become a reality now. Government guarantee for Security Receipts would certainly hedge the risks involved by assuring a return of threshold value. This also indicates that one would see a lot of movement in stressed debt market with more and more accounts being restructured through NARCL route," Siddharth Srivastava, partner, Khaitan & Co. said.

However, in September this year, the Union Cabinet approved the proposal to formalise sovereign backing for the securities receipts issued by the NARCL. This paved the way for the operationalisation of NARCL.

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first published:September 16, 2021, 18:15 IST