FM Nirmala Sitharaman announces over Rs 30,000 cr guarantee for bad bank

Banks have identified bad loans worth Rs 90,000 crore to be transferred to NARCL in the initial phase, says Finance Secretary Debasish Panda

Finance Minister Nirmala Sitharaman on Thursday announced a formal government guarantee on the securities receipts that the planned ‘bad bank’ will issue to banks as it takes on non-performing assets from their books. The government guarantee will be Rs 30,600 crore, she said.

The Union Cabinet on Wednesday cleared a proposal to provide government guarantee to security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans, Sitharaman said at a press briefing in New Delhi. NARCL proposes to acquire stressed assets of about Rs 2 trillion in phases within extant regulations of RBI. NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

"Substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution," said Ministry of Finance on the rationale for setting up the bad bank.

The Finance Minister in Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books. The guarantee will be valid for 5 years. "15% cash payment will be made to banks for NPAs based on some valuation, 85% will be given as Security Receipts. For Security Receipts to have their value intact, Govt has to give a backstop arrangement, hence the govt guarantee of Rs. 30,600cr cleared by Union Cabinet," said Sitharaman.

"Budget announced the intent to set up an ARC-AMC to takeover existing debt, manage and dispose them off to buyers to realise the value of the stressed assets," said Sitharaman. Banks have identified around bad loans worth Rs 90,000 crore to be transferred to NARCL in the initial phase, said Finance Secretary Debasish Panda. NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 trillion. In phase I, fully provisioned assets of about Rs 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.

"The Union Cabinet yesterday approved Central Government guarantee up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company Limited. In 2015, an asset quality review of banks had happened, this review revealed a high incidence of Non-Performing Assets (NPAs). In last six financial years, the govt's 4Rs strategy - Recognition, Resolution, Recapitalisation and Reforms - was executed, after this banks have recovered Rs 5,01,479 crore," added Sitharaman.

In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses, said FM. "An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt," she had said in the Budget speech. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation, she had said.

PSBs will maintain 51% ownership in NARCL. India Debt Resolution Company Ltd. (IDRCL) is a service company/operational entity, which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders. The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition. Capitalisation of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). it will also raise debt as required.The GoI guarantee will reduce upfront capitalization requirements.