Union Finance Minister Nirmala Sitharaman, on Thursday, announced that the government will provide Rs 30,600 crore in guarantees to National Asset Reconstruction Company Ltd. to buy bad loans from banks.
The NARCL will purchase bad loans from banks under a 15:85 structure, where
it will offer 15% 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 government.
The NARCL will purchase bad loans from banks under a 15:85 structure, where
it will offer 15% 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 government.
The value of bad loans is being carved out of bank books for transfer to
the NARCL is around Rs 2 lakh crore. About Rs 90,000 crore in bad loans
will be transferred in the first phase.
The guarantee of Rs 30,600 crore will cover the entire pool of Rs 2 lakh
crore. The guarantee will represent the difference between the face value
of the assets and the amount realised from sale or liquidation of assets
via the NARCL.
The guarantee will be valid for a period of five years. The government will
get a guarantee fee of 0.25%, which will progressively rise over the years.
A 15% cash payment will be made to the banks for the assets, after a
valuation process.
The remaining 85% will be paid in the form security receipts, which will be
backed by the government. An India Debt Resolution Company Ltd will also be
set up. In NARCL, public sector banks will have 51% ownership. In IDRCL,
public banks will hold 49% stake, with private-sector lenders holding rest.
The NARCL is India's version of the bad bank which aims to consolidate bad
loans from lenders and resolve them through a debt management company. The
debt management company will be fully owned by NARCL and will be managed by
private sector professionals who will oversee the management and resolution
of stressed assets.
BloombergQuint had previously reported that 16 lenders, including 12 public
sector banks and four private banks, will hold equity stake in NARCL, where
Canara Bank will be the sole sponsor with a 12% stake.
The bad bank has applied for an ARC licence with the Reserve Bank of India,
so it can start purchasing bad loans. Once the NARCL receives the RBI's
licence, it will start with buying the 22 stressed accounts shortlisted by
banks for sale in the first phase.
The total banking sector exposure to these accounts stands at over Rs
82,000 crore. This list includes large corporate accounts such as Videocon
Oil Ventures Ltd., Amtek Auto Ltd., Castex Technologies Ltd., Jaypee
Infratech Ltd. and Reliance Naval & Engineering Ltd., BloombergQuint had
reported in June. These are accounts are fully provided for, which will
help banks sell them without any haircuts or further provisioning.
A bad bank is good for the banking sector and will provide a ray of hope for any bank which is on the verge of collapse.
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