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‘Bad bank’ to clear off bad loans as per the sovereign guarantee announced by the Union Cabinet

Legal Correspondent: Mansi Tekam


30th September 2021: The Union Cabinet has proposed a sovereign guarantee worth over Rs 30,000 crore for the National Asset Reconstruction Company (NARCL) to clear off bad loans of Rs 90,000 crore as estimated by the banks. Finance Minister Nirmala Sitharaman had earlier announced that the NARCL would pay up to 15% of the agreed-upon loan amount in cash, with the other 85% paid in government-guaranteed securities receipts, which will be valid for five years. Only the banks could initiate the latter on resolution or liquidation of the said assets. Furthermore, NARCL has to pay a guarantee cost to deter resolution delays, which grows over time. In the first phase trial, the banks identified twenty-two bad loan accounts, aggregating about Rs 89,000 crore of provisioned assets to be transferred to NARCL, whereas the second phase trial will see the transfer of stressed assets with lower provision.


The bad bank will only take up stressed assets worth Rs 500 crore or more. An asset quality review was done in 2015 disclosed a high incidence of Non-Performing Assets (NPAs). The govt’s 4Rs strategy - Recognition, Resolution, Recapitalisation, and Reforms- was implemented for the last six financial years, after which banks have recovered over five lakhs crore. In totality, the new proposal will address the issues faced by the banking sector since 2015. Only two public sector banks (PSBs) reported financial losses in 2021 compared to the 2018 data on the profitability of two banks out of 21 PSBs. The proposal is pursuant to the Budget speech given by the Finance Minister earlier this year to set up an asset reconstruction company and an asset management company to consolidate and take over the Indian bank’s stressed debts. It also provides government plans to set up a dual structure wherein NARCL will acquire assets and India Debt Resolution Company Ltd. (IDRCL) will manage them and raise institutional funding through alternate investment funds (AIFs). The final acceptance of an offer to the lead banks is set in motion; IDRCL will engage in value addition and management of the assets. The PSBs will hold NARCL’s 51 percent ownership. IDRCL is a service company/operational entity that will manage the asset and involve market professionals and turnaround specialists. PSBs and Public FIs will have a maximum share of 49 percent, with the remainder held by private-sector lenders. The government will incur no monetary costs as a result of the bank guarantees it offers.


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