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NARCL: Another brick in the wall; not too different from other ARCs

Having several routes for NPA resolution has both advantages and disadvantages as the decision will finally be taken by the banks

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NPA resolution | public sector banks | ARC

Madan Sabnavis  |  Mumbai 



Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
Madan Sabnavis, chief economist, CARE Ratings (Photo: Kamlesh Pednekar)

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  • National Asset Reconstruction Company Limited (NARCL) is another attempt being made to resolve the NPA issue. DRTs, Lok Adalats, ARCs and have all been routes chosen by the government in the past to take on the bad loans of banks so that they could concentrate on banking rather than resolving bad loans. The idea is good to have a bad bank, even though the future is uncertain as the asset reconstruction companies have not had a great time on the street. too has witnessed diminishing returns literally with the recovery rate coming down as the issue gets complex with delays in resolution. How is NARCL different?

    Two things stand out. First, it is being set up by public sector banks, which makes a difference insofar as banks will be willing to sell their assets in return for cash/securities. Earlier, the challenge was on the pricing where the company would talk of deep haircuts which the bank was not willing for. Now, with the transaction being through banks there would be more willingness to come forward. The guarantee will ensure that at the time of liquidation or resolution, the difference between the value at this point of time and the security value will be made good by the government.

    The second is that the government is playing a role here by giving a guarantee to the securities that are being issued by NARCL when it takes over the bad loans. The present formula will be 15% in cash and 85% through securities that are guaranteed by the government. There is talk of Rs 2 trillion of NPAs being addressed through this route with the guarantee being Rs 30,600 crore to begin with.

    What the government has outlined is the structure of the new organisation. But is it different from the other ARCs? The answer is not really, as conceptually they will do the same job and look to resolving the bad assets. The initial assets bought by NARCL will be those that have been fully provided for, which is good for its working as this is an experiment on an existing model and the success will finally be dependent on how much is the recovery.

    has had superior results compared with ARCs and DRTs and one can be skeptical on whether the realisation will be very different. Time will tell. But having several routes for has both advantages and disadvantages as the decision will finally be taken by the banks. The positive part is that having alternative systems widens the scope for resolution given the volume of NPAs that is outstanding.

    The disadvantage is that this can lead to a situation where banks can arbitrage between NARCL and IBC. IBC is more time bound and hence may look stricter while NARCL is still a concept and would tend to be more flexible. There could also be pressure put by the defaulting company to avoid going to the IBC and using the NARCL route and this may be acceptable because to begin with one would not know how successful this institution in terms of recovery would be. Further having more options (even though NARCL is still to be tested) may just lead to dilution of credit standards just at the time when the system is getting out of the morass of NPAs. This is a pitfall which should be avoided at all costs.

    Madan Sabnavis is chief economist at CARE Ratings and author of Hits and Misses: The Indian Banking Story. Views are personal

    Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.


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    First Published: Thu, September 16 2021. 18:44 IST
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