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Finance Ministry announces over Rs 30,000 cr guarantee for bad bank

Friday, 17 Sep 2021

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Finance Minister Nirmala Sitharaman has announced a formal government guarantee on the securities receipts that the planned ‘bad bank’ will issue to banks as it takes on non-performing assets from their books. The government guarantee will be Rs 30,600 crore.

The Union Cabinet cleared a proposal to provide government guarantee to security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans.

NARCL proposes to acquire stressed assets of about Rs two trillion in phases within extant regulations of RBI. NARCL will pay up to 15 percent of the agreed value for the loans in cash and the remaining 85 percent will be government-guaranteed security receipts.

The guarantee will be valid for five years. Cash payment of 15 percent will be made to banks for NPAs based on some valuation, 85 percent will be given as Security Receipts. For Security Receipts to have their value intact, government must give a backstop arrangement, hence the government guarantee of Rs 30,600 crore cleared by Union Cabinet.

Banks have identified around bad loans worth Rs 90,000 crore to be transferred to NARCL in the initial phase. NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs two trillion.

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 will be transferred in Phase-II.

The Union Cabinet approved the Central government guarantee up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company.

PSBs will maintain 51 percent ownership in NARCL. India Debt Resolution Company. (IDRCL) is a service company/operational entity, which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49 percent stake and the rest will be with private sector lenders. NARCL will acquire assets by making an offer to the lead bank.

Once NARCL’s offer is accepted, IDRCL will be engaged for management and value addition. Capitalisation of NARCL will be through equity from banks and Non-Banking Financial Companies (NBFCs). It will also raise debt as required. The government of India guarantee will reduce upfront capitalisation requirements.