Here Is How Bad Banks Will Help Clear Out NPA Mess

In a move aimed at a major clean-up of bad loans in the banking system, the Centre on Wednesday, September 15, cleared a ₹30,600-crore guarantee programme for securities to be issued by the newly incorporated 'bad bank' for taking over and resolving non-performing assets (NPAs) amounting to ₹2 lakh crore.

Security receipts represent an undivided right or interest in a financial asset. Typically, asset reconstruction companies or a bad bank buy distressed assets paying 15 percent cash and the balance 85 percent in security receipts. The Reserve Bank of India is in the process of granting a licence for the National Asset Reconstruction Company Limited (NARCL), following which toxic assets worth ₹90,000 crore that banks have already fully provided for, will move to the NARCL.

Finance Minister Nirmala Sitharaman said the Cabinet's decision to extend a five-year guarantee for NARCL-issued security receipts to banks completed the entire cycle of cleaning up India's banking system that began with the recognition of the extent of bad loans in 2015.

'Banks Have Recovered Rs 5,01,479 Crore In Last Six Years'

Sitharaman said that in the last six financial years, banks have recovered ₹ 5,01,479 crore. Of this ₹3.1 lakh crore have been recovered since March 2018. She added that the government guarantee will give more confidence to lenders to sell their assets to NARCL.

Under the proposed mechanism, the NARCL will acquire assets by making an offer to the lead bank. Private sector asset reconstruction (ARCs) firms may also be allowed to outbid the NARCL. Separately, public and private lenders will combine forces to set up an India Debt Resolution Company (IDRC) that will manage these assets and try to raise their value for final resolution.

"A 15 percent cash payment will be made to banks for their toxic assets, 85 percent will be security receipts. There will be a backstop guarantee for the banks," the FM said. Once the NARCL and the IDRC have finally resolved the asset, preferably as a going concern and not through liquidation proceedings, the minister said the balance 85 per cent held as security receipts would be given to the banks.

Financial Services Secretary Debashish Panda said that the five-year limit will encourage banks to not drag the process, adding NARCL has already been incorporated as a company. He said ₹ 90,000 crore worth of NPAs will be transferred to the NARCL in the first phase.

While public sector banks will have a 51 per cent ownership in the NARCL, their shareholding along with that of public sector financial institutions will be capped at 49 per cent for the IDRC, with private lenders bringing in the rest of the equity capital.

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