Cabinet Clears Government Guarantee Of Rs 30,600 Crore For Bad Bank

The Union Cabinet has approved Central Government guarantee of up to Rs 30,600 crores to National Asset Reconstruction Company Limited for five years.

Union Cabinet has approved bank guarantee for bad bank

The National Asset Reconstruction Company Limited (NARCL) will receive Central Government's guarantee of up to Rs 30,600 crore for supporting its security receipts. These receipts will be issued by the entity to acquire stressed loan assets. The government guarantee will be applicable for a period of five years. 

NARCL plans to acquire stressed assets worth Rs 2 lakh core in a phased manner. It will take over such assets through 15 per cent cash component and 85 per cent with the help of security receipts. 

The proposal to back the company's security receipts through Rs 30,600 crore bank guarantee, was approved by the Union Cabinet on September 15, Finance Minister Nirmala Sitharaman said in a press conference on Thursday.  

Known as bad bank in common parlance, NARCL has been formed by public sector banks to consolidate all non performing assets (NPAs), which will be then put up for resolution. It has already applied for a licence with the Reserve Bank of India (RBI). 

An asset reconstruction company is a specialised financial institution that buys NPAs or stressed assets from banks so that they can clean up their balance sheets. 

The government guarantee will be used to cover the shortfall between the amount realised from stressed assets and the face value of security receipts issued for those assets. However it will be subject to the overall ceiling of Rs 30,600 crore. 

NARCL's security receipts receiving government's guarantee means that the entire process of acquiring bad assets by the company has Centre's backing, and it will help in faster resolution of such assets.  

Public sector banks will have a majority stake of 51 per cent in NARCL, while the task of managing assets and engaging with market professionals will be undertaken by India Debt Resolution Company Limited (IDRCL), which will be a service company. 

The NARCL will acquire assets by making an offer to the lead bank and once its offer is accepted, IDRCL will be engaged for management and value addition. 

IDRCL is in the process of being setting up and the majority stake in it will be with private sector lenders, while public sector banks and public financial institutions will hold up to 49 per cent stake in it. 

Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost, Ms Sitharaman added. 

She informed that in 2015, an asset quality review of banks had been conducted, which had revealed NPAs worth thousands of crores. 

In the last six years, the government's strategy of four "Rs", i.e. Recognition, Resolution, Recapitalisation and Reforms helped in recovering Rs 5,01,479 crores, said Ms Sitharaman.