Finance Minister Nirmala Sitharaman announced on Thursday, 16 September, that the central government will provide guarantee of up to Rs 30,600 crore for the security receipts which will be issued by the National Asset Reconstruction Company Ltd (NARCL) or 'bad bank'.
Sitharaman, in her Budget speech for 2021-22, had announced the creation of NARCL or bad bank in order to resolve large cases of stressed assets.
Bad loans will be purchased from banks by the NARCL under 15:85 structure where it will offer 15 percent of the net asset value in cash and issue security receipts for the rest. A part of these security receipts will be guaranteed by the Union government.
Moreover, public sector banks will have a 51 percent ownership in NARCL.
Sitharaman had said in her Budget speech, “An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation."
She said that the NACRL framework will be a significant step that will help banks facilitate to make a decision as the security provided will maintain the strength of bank balance sheets. Adding that the banks would require to make higher provision in case of absence of a guarantee.
Speaking at the press conference, Sitharaman said that banks have recovered more than Rs 5 lakh crore in the the last six financial years. She added that out of the amount recovered, Rs 3.1 lakh crore has been recovered since March 2018 from the written off assets.
Sitharaman added that the guarantee will be valid for a period of five years. Meanwhile, an India Debt Resolution Company Ltd will also be set up.
Meanwhile, the Indian Banks’ Association (IBA) moved an application to the Reserve Bank of India (RBI) in August, seeking licence to set up a Rs 6,000 crore NARCL.
The bad bank was incorporated last month in Mumbai following the registration with Registrar of Companies (RoC).
Will RBI Support 'Bad Bank'?
According to the reports of News 18, RBI Governor Shaktikanta Das on Thursday said that it will consider the idea of 'bad bank' to manage the bad loans of the banks. Earlier, when RBI initiated the Asset Quality Review (AQR) under Raghuram Rajan, it was not able to implement it.
Speaking to News 18, Rajan mentioned that he was against the idea of setting 'bad bank' as he found that shifting loans from one public bank to other would not improve the situation.
Saying that the Fugitive Economic Offenders Act of 2018 is showing a lot of results, Sitharaman informed that large frauds of Rs 100 crore or more have an average lag time of 57 months for fraud detection.
Referring to the five-year limit, Financial Services Secretary Debashish Panda said that the five-year limit will encourage banks to not drag the process and added that Rs 90,000 crore worth of Non-Performing Assets (NPAs) will be transferred to the NARCL in the first phase.
The FM informed that India Debt Resolution Company Ltd will be set up to manage the NPAs, in which public sector banks (PSBs) and state-owned financial institutions will own 49 percent stake.
(With inputs from News18)
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