Centre Guarantees Rs.30,600 Crore Support for Bad Banks

On Thursday, the Union Cabinet approved the Central Government guarantee of Rs.30,600 crore on the Security Receipts (SRs) issued by the National Asset Reconstruction Company (NARCL), also called the Bad Bank for acquiring stressed loan assets.

The NARCL proposes to acquire about Rs.2 lakh crore stressed assets in phases within the Reserve Bank of India’s (RBI) existing regulations. It intends to acquire the stressed assets through 15% cash and 85% in SRs. It will acquire these assets by making an offer to the lead bank. 

When the lead bank accepts the offer made by the NARCL, the India Debt Resolution Company Limited (IDRCL) will handle the management, value addition, and selling of bad loans.  The NARCL is expected to resolve stressed loan assets exceeding Rs.500 crore, amounting to a total of around Rs.2 lakh crore. In phase I, there is an expectation of transfer of the fully provisioned assets to the NARCL of about Rs.90,000 crores, while the transfer of the remaining assets with lower provisions would be in phase II.

The banks have set up NARCL to consolidate and aggregate stressed assets for their subsequent resolution. The Public Sector Banks (PSBs) will maintain 51% ownership in the NARCL. It has applied to the RBI for an Asset Reconstruction Company (ARC) license.

The IDRCL is an operational entity/service company that will manage the asset, engage market professionals and turnaround experts. The PSBs and Public Financial Institutions will hold a maximum of 49% stake, and the rest will be with the private-sector lenders.

Even though there are 28 existing ARCs, the NARCL-IDRCL structure is necessary as an additional alternative/option for resolving the stressed assets due to the large stock of NPAs. The government guarantee of up to Rs.30,600 will back the SRs issued by the NARCL to help deal with the backlog of NPAs.

The government guarantee will provide contingency buffers, impart credibility, and enhance the liquidity of such SRs as they are tradable. The condition precedent for invocation of guarantee would be liquidation or resolution, and it will be valid for five years. 

The government guarantee will cover the shortfall between the actual realisation from the underlying assets and the face value of SRs issued for that asset, subject to the overall ceiling of Rs.30,600 crore. Since there will be a pool of assets, there is an expectation that their actual realisation will be more than the acquisition cost.

To disincentive delay in resolution, the NARCL will have to pay a guarantee fee of 0.25% (of the outstanding guarantees) from the second year of its incorporation. There will be an increase in the guarantee fee progressively to 0.5% in the third year, 1% in the fourth year and 2% in the fifth year. 

The government guarantee of Rs.30,600 to support NARCL or the Bad Bank by backing the SRs issued by them is a good step towards resolving stressed assets worth Rs.2 lakh crore. Since the government supports the NARCL structure, it will make the entire process more viable and credible.

Join our Telegram channel to keep getting updates on all things finance.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in