Government sets up ‘bad bank’ to clear the NPA mess

What is the News?

Cabinet has cleared a ₹30,600-crore guarantee programme for securities to be issued by the National Asset Reconstruction Company Limited(NARCL) for taking over and resolving non-performing assets(NPAs).

What is NARCL?

NARCL is India’s first-ever “Bad Bank”. It has been incorporated as an Asset Reconstruction Company (ARC) under the Companies Act.

Purpose: It has been set up to acquire and consolidate stressed assets for their subsequent resolution.

Owned by: Public Sector Banks(PSBs) will maintain 51% ownership in NARCL and private lenders will hold the rest.

What is India Debt Resolution Company Ltd (IDRCL)?

IDRCL is an operational entity of NARCL. It will manage the stressed assets acquired by NARCL and try to raise their value for final resolution.

Owned by: Public Sector Banks(PSBs) and Public Financial Institutions(FIs) will hold a maximum of 49% stake and the rest will be with private-sector lenders.

How will the NARCL and IDRCL work?

The NARCL will acquire assets by making an offer to the lead bank. It will acquire nearly Rs 2 lakh crore of stressed assets from banks. These will be high value stressed loan assets of more than Rs 500 crore. 

Once acquired, it will pay banks 15%  cash upfront for these assets and issue “security receipts” for the remaining 85% of the asset value.

The stressed assets acquired by NARCL will then be handled by IDRCL. It will focus on the resolution of the assets and employ turnaround professionals. When the assets are sold, the commercial banks will be paid back the rest.

If NARCL-IDRCL is unable to sell the stressed assets or has to sell it at a loss, then the government guarantee will be invoked. Under this, the difference between what the commercial bank was supposed to get and what they were able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

What benefit do banks get from this new structure?

It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. 

This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth.

Further, it will bring about improvement in the bank’s valuation and enhance their ability to raise market capital.

Source: This post is based on the following articles

• “Government sets up ‘bad bank’ to clear the NPA mess” published in The Hindu on 17th September 2021.
• “​​FM Sitharaman announces Rs 30,600 crore govt guarantee for bad bank” published in The Indian Express on 17th September 2021.
• “Explained: What’s good about a ‘bad bank’” published in The Indian Express on 17th September 2021.
• “Centre to help offload ₹2 tn NPAs in five years” published in Livemint on 17th September 2021.