Union Cabinet clears decks for National Asset Reconstruction Company

What is the News?

The Union Government has approved a proposal that requires the government to guarantee Security Receipts(SR) issued by National Asset Reconstruction Company Ltd (NARCL) when buying non-performing assets (NPAs) from banks.

This will clear the path for the launch of National Asset Reconstruction Company (NARCL). 

Note: Security Receipts (SR) are issued by ARCs when Non-Performing Assets(NPAs) of commercial banks(CB) or financial institutions(FI) are acquired by the ARCs for the purpose of recovery.

About National Asset Reconstruction Company Ltd(NARCL)

The NARCL is a type of Bad Bank that has to be set up to resolve the problem of bad loans impacting the public sector banks.

Note: A bad bank is basically an entity that houses the bad loans (non-performing assets) of banks and resolves or liquidates them to recover as much money as it can.

Sponsored by: The NARCL is sponsored primarily by Canara Bank (likely to take a 12% equity stake) and has equity participation by other nationalised banks.

Functions: NARCL will buy the bad loans from banks and issue security receipts (SR) for up to 85% and cash for the remaining, in line with standard industry practice. These receipts are redeemable as and when the ARC recovers a specific loan. 

Source: This post is based on the article “Union Cabinet clears decks for National Asset Reconstruction Company” published in Business Standard on 16th September 2021.