Canara Bank to be lead sponsor of bad bank, to pick up 12% stake

State-owned Canara Bank on Tuesday said it will be the lead sponsor of National Asset Reconstruction Company Limited (NARCL) or bad bank with 12 per cent stake in the entity.

Bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

"The Indian Banks' Association (IBA), vide their letter dated May 13, 2021 requested Canara Bank to participate in NARCL as sponsor. The board of Canara Bank has given in-principle approval for taking stake in NARCL," Canara Bank said in a regulatory filing.

Following the board nod, it said, the bank has sought the approval from the Reserve Bank of India for participating in NARCL as sponsor contributing 12 per cent stake.

Various public sector banks (PSBs) have also announced that they have earmarked a signification portion of their NPAs to be transferred to NARCL.

For example, Punjab National Bank (PNB) said that it has identified non-performing assets of Rs 8,000 crore to be transferred to NARCL.

The proposed NARCL would be 51 per cent promoted by PSBs and remaining by private sector lender.

Banks have identified around 22 bad loans worth Rs 89,000 crore to be transferred to the NARCL in the initial phase.

Finance Minister Nirmala Sitharaman 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.

"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 added.

Last year, the IBA had made a proposal for creation of a bad bank for swift resolution of non-performing assets (NPAs). The government accepted the proposal and decided to go for asset reconstruction company (ARC) and asset management company (AMC) model for this.

The IBA was appointed nodal agency to constitute the Asset Reconstruction and Asset Management Companies designated as NARCL and India Debt Management Company Ltd (IDMCL) respectively.