The government on Thursday announced the setting up of the National Asset Reconstruction Company, which will take over bad debt of nearly Rs 2 lakh crore from banks, and promised to provide backup guarantee of over Rs 30,600 crore to the entity.
Under the plan cleared by the Union Cabinet, the NARCL will acquire the impaired assets from lenders, and India Debt Resolution Company, which will be a service company majority owned by private sector banks and institutions, will manage the asset and seek to add value, wherever needed.
NARCL, or the bad bank, will bid for the impaired assets from banks — with Rs 90,000 crore of the completely written down assets to be taken over first — and the other ARCs will compete through a Swiss challenge method.
Like in other such transactions, banks will be paid15% of the value of the impaired asset in cash, with the remaining coming in the form of security receipts. “Based on the estimates from the lenders, we have arrived at the value of guarantees, which will be valid for five years. It will be invoked at the time of resolution or liquidation and is meant to cover any shortfall between the face value of the SRs and the actual realisation,” finance minister Nirmala Sitharaman said.
The FM said they were part of steps initiated by the Modi government to clean up the books of banks since it first came to power in 2014. She said that the steps have resulted in over Rs 5 lakh crore having been recovered by banks, with Rs 3.1 lakh crore coming back since March 2018. She also said that guarantees have been provided but may not necessarily be invoked.
Financial services secretary Debasish Panda said guarantees were the norm globally. “It will enhance the credibility of the process. Through the new ARC we are looking at aggregation of assets, quicker resolution, better valuation from the process and freeing up of bank officers from the recovery process, allowing them more time to deal with other issues,” Panda added.
“Going by historical average recovery performance of various assets either resolved or liquidated in last five years, from a debt pool of Rs 2 lakh crore, recovery of Rs 30,600 crore being guarantee amount, is most likely to be recovered in full on an aggregate basis. If upside is netted at aggregate pool level instead of shared for individual accounts with lenders, there is a possibility of no outgo from the government,” UV ARC director Hari Hara Mishra said.