NARCL pegs its funding requirement at Rs 6,000 crore: Details here

The National Asset Reconstruction Company (NARCL) has pegged its total capital requirement at Rs 6,000 crore. The banks and financial institutions who would be shareholders in the new ARC have been requested to participate in both equity and debt requirements of Rs 6,000 crore, according to a proposal shared with investors.
 
The capital funding structure would follow a debt and equity ratio of 1:1, according to the proposal, reviewed by Business Standard. This is proposed to be raised from the asset reconstruction company’s (ARC) investors. The equity shareholders of NARCL would have to mandatorily subscribe to debt in identical ratio of their shareholdings.
 
The NARCL is looking at close to 7-8 public sector banks, five private sector banks, and two financial institutions — Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) for meeting its capital requirements. Among the private banks proposed are Kotak Mahindra Bank, IDBI Bank, Axis Bank, ICICI Bank, and HDFC Bank.
 
However, the two FIs that have exposure to the power sector are wary of making equitable contributions to the NARCL’s capital. Senior executives said, as there is no asset of PFC and one of REC as part of NARCL’s list of assets, they are not keen to invest more. “This is the same reason that PFC did not agree to be a sponsor. REC is keen to invest but PFC is fund crunched, especially after taking over Centre’s stake in REC. It cannot invest the same as banks which have a higher NPA exposure than PFC. Another reason is that the two FIs have also resolved most of their NPA accounts,” said a senior executive, requesting anonymity.
 
As PFC refused, Canara Bank was brought on board to be the sponsor for the NARCL.

 
The capital cost requirement of the NARCL is based on the acquisition cost of bad loans worth Rs 2 trillion which translates to 20 per cent of the cost or Rs 40,000 crore. Out of this Rs 40,000 crore, the cash required is estimated to be in the tune of 15 per cent or Rs 6,000 crore, while the balance Rs 34,000 crore would be in form of security receipts in the books of banks. 
 
Government officials said the security receipts would be backed by the central government for a period of five years up to its face value. The government is expected to provide a guarantee worth Rs 31,000 crore on security receipts for the five year-period, he said. Towards this, the NARCL is estimated to pay about Rs 600 crore to the government as a guarantee fee, according to the proposal cited above.
 
With regards to the recovery, NARCL expects to recover 28 per cent i.e Rs 56,000 crore over a five-year period, from the first set of assets worth Rs 2 trillion.
 
The capital infusion in the ARC would be done in phases, and would be in line with the stressed assets acquired by the company. Initially, the capital required for NARCL would be Rs 100 crore for applying for an ARC license. So far, banks have collectively identified 22 accounts worth Rs 89,000 crore that will be transferred to the NARCL.
 
The NARCL and the Indian Asset Management Company (IAMCL), which will provide asset management services to the ARC, will have a common set of investors. The IAMCL has been pitched to be an asset light model, and the total capital requirement has been estimated at Rs 50 crore.
 
Both NARCL and IAMCL will follow an independent governance structure, and at least 50 per cent of its directors to be independent. The chairman of the NARCL will be an independent director.
 
The board of the two entities shall have banking, sectoral and resolution experts as directors. The IAMCL will hire resolution specialists and sectoral experts at market linked remuneration.