India’s ‘Bad Bank’ Is Born, NARCL Will Buy Rs 2 Lakh Crore Debt

Table of Contents

What has happened?

The Narendra Modi government Thursday released the fineprint of the proposed entity,
That will acquire stressed assets from bank balance sheets to enable them to lend to productive sectors of the economy.
Finance Minister Nirmala Sitharaman announced that the National Asset Reconstruction Co. Ltd (NARCL),
Which is loosely referred to as a ‘bad bank’, has received the Union cabinet’s nod and will address the “twin balance sheet” problem faced by the Indian financial sector.

The NARCL 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.
It will pay banks 15 per cent cash upfront for these assets and issue securitisation receipts for the remaining 85% of the asset value.

The cabinet approved a Rs 30,600 crore guarantee to back these securitisation receipts.
This guarantee will come into play if the asset is not able to realise its value and will be valid for five years.
In the past, the track record of private ARCs in repaying SRs has been very pitiable.
There are some 28 private ARCs, but they generally buy small to medium size loans.
They do not take up big-ticket assets. Therefore, there is a need for government-backed SRs for five years.
NARCL, in which state-owned banks have a 51% stake, is currently awaiting the nod of the Reserve Bank of India (RBI) to operate as an asset reconstruction company.
Parallelly, lenders have completed the process of identifying ‘toxic assets’ that can be transferred to NARCL.
The company has also undertaken the valuation of these assets, Financial Services Secretary Debasish Panda said.

The stressed assets acquired by NARCL will be managed by another entity.
This company, India Debt Resolution Co. Ltd, will focus on resolution of the assets and employ turnaround professionals.
This will free up bank personnel to focus on lending activities, Sitharaman said.
The minister said that the asset quality review undertaken in 2015 had revealed the stress faced by banks.
She added that the Modi government has undertaken many measures to comprehensively address the problems faced by the banking sector, including bringing in Insolvency and Bankruptcy Code, capitalisation of banks and governance reforms.

The resolution of bad loans in five years will be a big challenge.
The private ARCs have been struggling to resolve the issues as there has been a lack of interest among buyers.
Many of the NPAs have very little value left for getting a good price.

Q) SARFAESI Act, 2002 is not applicable to which type of Loan?