NARCL expects to recover up to Rs 64,000 cr through resolution of bad loans

Bad bank and AMC may get 15 per cent of upside recovery in NPAs resolved in first year itself

The newly formed National Asset Reconstruction Company (NARCL) expects to recover between Rs 50,000 crore and Rs 64,000 crore through the resolution of bad loans amounting to Rs 2 trillion. The most likely recovery has been pegged at 28 per cent or Rs 56,000 crore.

Among other recovery scenarios for NARCL’s portfolio, the lowest estimation of recovery has been pegged at 25 per cent or Rs 50,000 crore, according to internal estimates. On the other hand, the highest recovery rate is pegged at 32 per cent where the NARCL is expected to recover Rs 64,000 crore.

Recovery from the resolution of bad loans would, however, be based on valuation done by investors while bidding for these assets, the official quoted above said.

The NARCL, dubbed as a bad bank, will buy bad loans of banks at 18 per cent of the book value of Rs 2 trillion-worth soured assets, which comes to around Rs 36,000 crore. About 15 per cent of Rs 36,000 crore would be paid by NARCL to banks in cash and the remaining 85 per cent would be through security receipts guaranteed by the Centre. 

The upside in recovery, which is above the acquisition cost, will be distributed among lenders. The NARCL and the India Debt Resolution Company (IDRCL) — the asset management company will get 15 per cent of the difference between the acquisition cost and amount recovered if NPAs are resolved in the first year itself. About 70 per cent of this would go to the NARCL and the IDRCL would receive 30 per cent.

For recoveries above 18 per cent--the acquisition cost -- from the resolution of bad loans, the NARCL and IDRCL will get 10 per cent in the second year, 8 per cent in the third year, 6 per cent and 4 per cent in the fourth and fifth year, respectively in the ratio of 70:30.

“The higher fee in initial years has been fixed to incentivise quick resolution of bad loans,” the official quoted above said.

The NARCL is also finalising the trusteeship fee that it will get from the resolution of bad loans, the official said. This has been pegged at 0.80 per cent per annum, and the bad bank is projected to receive nearly Rs 1,090 crore as trusteeship in five years.

For IDRCL, the management fee has been estimated at 0.20 per cent a year. This comes to around Rs 270 crore for managing bad loans of Rs 2 trillion.