Finance Minister Nirmala Sitharaman on Thursday announced the formation of a government-backed bad bank, National Asset Reconstruction Company Ltd (NARCL). The Union Cabinet has approved up to Rs 30,600 crore of securities receipts.
What is NARCL?
The NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL is basically a bad bank created by the government in the mould of an asset reconstruction company.
The NARCL will pick up bad loans above a certain threshold from banks and would aim to sell them to prospective buyers of distressed debt. The NARCL will also be responsible for valuing bad loans to determine at what price they would be sold. The bad bank would provide government receipts to banks as it takes on non-performing assets from their books.
State-owned banks will hold 51% stake, while FIs or debt management companies will hold 49%.
What is IDRCL?
Along with NARCL, the government will also set up the India Debt Resolution Company Ltd (IDRCL). The IDRCL is a service company or an operational entity, which will manage assets and loop in market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.
Background
Last year, The Indian Banks’ Association had proposed to create a bad bank for swift resolution of non-performing assets (NPAs). Following this, the finance minister in the 2021-22 Union Budget proposed the setting up of an ARC, along with an Asset Management Company (AMC), to take over the stressed debt of banks.
During the Union Budget 2021-22, Sitharaman said the bad bank will manage and dispose the assets to alternate investment funds and other potential investors for eventual value realisation.
In August, IBA moved an application to the RBI seeking licence to set up the over Rs 6,000-crore bad bank. The NARCL was incorporated last month in Mumbai, following the registration with the Registrar of Companies.
Also read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore on securities receipts
The Plan
The government will not have any direct equity contribution to NARCL. It will guarantee securities receipts issued by NARCL, which will buy the bad loans from banks.
These receipts will be valid for five years, and condition precedent for invocation of guarantee will be resolution or liquidation.
NARCL is intended to resolve stressed loan assets above Rs 500 crore each, amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.
As per industry practice, it will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be securities receipts.
The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, IDRCL will be looped in for management and value addition.
How is NARCL different from existing ARCs?
The proposed bad bank will have a public sector character and majority ownership is likely to rest with state-owned banks.
At present, ARCs typically seek a steep discount on loans. With the NARCL, the valuation issue is unlikely to come up since this is a government initiative.
The government-backed ARC will have deep pockets to buy out big accounts, and thereby free up banks from carrying these accounts on their books.
Watch: Bad bank can be only a warehouse of bad assets, says Siby Antony
What benefit do banks get from this new structure?
It will incentivize quicker action on resolving stressed assets, and help in better value realisation. This approach will also permit freeing up banks personnel to focus on increasing business and credit growth.
As holders of these stressed assets and securities receipts, banks will receive the gains. Further, it aims to bring improvement in banks’ valuations and enhance their ability to raise market capital.
Watch: Bad bank to preserve value, timely sale of stressed assets: IBA CEO
