Bad bank’s Security Receipts to get Govt backing

The much awaited ‘bad bank’ — National Asset Reconstruction Company Ltd — moved a step closer to going live with the Union Cabinet approving a crucial proposal that requires the government to guarantee the security receipts (SR) issued by NARCL, when buying NPAs from banks.

To begin with, the government may earmark ₹31,000 crore for the guarantees, sources said. This is a contingent liability as of now and unlikely to impact the fisc in the short-term, they added.

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The Cabinet decision comes on the heels of NARCL getting incorporated in Mumbai last month and the Indian Banks Association (IBA) moving the Reserve Bank of India for a licence to set up ₹6,000-crore bad bank.

NARCL — sponsored primarily by Canara Bank (likely to take a 12 per cent equity stake) and have equity participation by other nationalised banks — will buy the bad loans from banks and issue SRs for up to 85 per cent and cash for the remaining, in line with standard industry practice.

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Already, PSBs have identified 22 stressed assets (consortium loans of over ₹500 crore) totalling ₹82,500 crore that will be transferred to the bad bank in phases. In the long run, stressed assets worth as much as ₹2-lakh crore are expected to be transferred to NARCL.

What is a bad bank?

A bad bank is basically an entity that houses the bad loans (non-performing assets) of banks and resolve or liquidate them to recover as much money as it can.

One of the big advantages of having an NARCL will be that it will avoid delays in decision making on recoveries as most lending had hitherto involved the consortium approach and required approval by multiple lenders before recovery could happen, said a former chief executive of a PSB.

Budget proposal

Finance Minister Nirmala Sitharaman had in this year’s Budget proposed the setting up of an ARC along with an Asset Management Company (to be called India Debt Management Company) to take over the stressed debt of banks. The AMC will be controlled by the private sector and would help turn around the stressed assets for eventual recovery. She had, however, not indicated that the government would guarantee the SR issued by NARCL.