Bad bank to acquire Rs2 lakh cr stressed assets in phases, Cabinet nods Govt guarantee of Rs30,600cr

NARCL has been set up by banks to aggregate and consolidates stressed assets for their subsequent resolution.

Sep 17, 2021 08:09 IST India Infoline News Service

The Finance Ministry had announced the blueprint of National Asset Reconstruction Company Limited (NARCL) aka bad bank. The Union Cabinet has approved the central government guarantee of Rs30,600cr to back Security Receipts issued by the NARCL.

Further, the ministry stated that NARCL proposes to buy about Rs2 lakh cr worth stressed assets in a phased manner within extant regulations of RBI. Notably, the bad bank plans to acquire these debts through a combination of 15% Cash and 85% in Security Receipts (SRs).

NARCL has applied to the RBI for the license as an Asset Reconstruction Company (ARC). It has been set up by banks to aggregate and consolidates stressed assets for their subsequent resolution. State-owned banks will maintain 51% ownership in NARCL.

Here are some FAQs about Central Government guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited for acquiring stressed loan assets:

The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

IDRC 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% stake and the rest will be with private-sector lenders.

Existing ARCs have been helpful in the resolution of stressed assets, especially for smaller value loans. Various available resolution mechanisms, including IBC, have proved to be useful. However, considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.

It needs to be noted that the resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from Government. This imparts credibility and provides for contingency buffers. Hence, the GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance the liquidity of SRs as such SRs are tradable.

A government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to an overall ceiling of Rs30,600 crore, valid for 5 years. Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost.

The GoI guarantee will be valid for five years and the condition precedent for invocation of guarantee will be resolution or liquidation. Further, to disincentivize delay in resolution, NARCL has to pay a Guarantee fee which increases with time.

Notably, the capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). it will also raise debt as required. The GoI guarantee will reduce upfront capitalization requirements.

NARCL is intended to resolve stressed loan assets above Rs500cr each amounting to about Rs2 lakh cr. In phase I, fully provisioned assets of about Rs90,000cr are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.

It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.

Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought a sharper focus on recovery. Despite these efforts, a substantial amount of NPAs continues on the balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.

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