Union Finance Minister Nirmala Sitharaman informed the press about the Union Cabinet’s approval to set up a “bad bank” to clean up bad loans in the Economy on Thursday.
Two government-monitored entities, National Asset Reconstruction Company Ltd (NARCL) and India Debt Resolution Company Ltd (IDRCL) will be constituted to free up stressed assets and resolve the “twin balance sheet” problem in the Indian financial sector.
National Asset Reconstruction Compant Ltd to takeover and sell NPAs worth 2 lakh crores
National Asset Reconstruction Company Ltd, dubbed loosely as the “bad bank”, is the first of its kind in the country.
It will acquire toxic loan assets worth more than five hundred crores from banks. Most of the big-ticket NPAs will be cleared in this manner to free up growth capital.
Government will issue Fiver Year Guarantee to NARCL Receipts
According to Debashish Pandey, the Secretary of the Department of Financial Services, banks will hand over toxic assets valuing ninety thousand crores to NARCL during the first phase.
The bad bank will then pay 15 per cent to the banks upfront in cash and the remaining 85per cent through security receipts (SRs) with a government guarantee.
The government will issue a five-year guarantee to NARCL receipts.
The cabinet constituted NARCL under the Companies Act.
The Reserve Bank of India will soon provide the “bad bank” with a license as an Asset Reconstruction Company (ARCs), and it can make offers to the lead banks to take over and sell the Non-Performing Assets or NPAs.
The Finance Ministry will then use a second entity called the India Debt Resolution Company Ltd (IDRCL) to regulate and raise the value of the acquired assets.
IDRCL will also employ market professionals and turnaround experts. Once the offer by NARCL is accepted, then IDRCL will be utilized for “management and value addition,” added Sitharaman.
The Public Sector Banks (PSBs) will own 51 per cent of NARCL and will hold a 49 per cent stake in the debt management company.
According to the finance minister, the government issued guarantee will cover the gap between the face value of the SRs and the realized value of the assets after its sale.
“For the security receipts to have their value intact, there is a need for the government to backstop,” she said. The five-year limit will ensure a timely resolution of the assets.
Part of the larger project to clean up bad loans in the country
Addressing a press conference after the cabinet cleared the project, the finance minister justified creating the NARCL-IDRCL structure by saying that existing asset reconstruction companies cannot resolve higher value NPAs.
Only alternatives like the bad bank will manage and dispose of high-value loans of five hundred crores and more to significantly reduce the NPAs in public sector banks.
The Finance Ministry had carried out an asset quality review of banks in 2015, and the study showed that there are many NPAs in the country.
The review led the government to formulate a ‘4R’ plan of Recognition, Resolution, Recapitalization and Reforms.
Sitharaman explained that the government had started the “recognition” part of the strategy as early as 2015.
The next step in the plan was to quantify the Non-Performing Assets which the ministry carried out in the last six financial years.
“The 4Rs were executed meticulously, and banks have recovered Rs 5,01,479 crore,” she concluded.
As of March 2021, India’s financial sector has Rs 8.35 lakh crores of bad loans in the form of Non-Performing Assets.