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Monday, December 6, 2021

Government announces NARCL, barricades bad debt

Non-Performing Assets (NPA) problems have been an alarming issue in Bharat and have received recognition since 2015 under Asset Quality Review. Our Hon’ble Finance Minister has announced a bad bank entity named National Asset Reconstruction Company Ltd (NARCL) which would acquire the stressed assets from bank’s balance sheets so that banks can lend to productive sectors of the economy efficiently. Twin balance sheet problem faced by financial sector shall be addressed with the bad bank and should quicken the resolution process.

NARCL will acquire nearly 2 lakh crore of stressed assets from debt-laden banks and NARCL would pay 15% upfront cash to banks and issue securitisation receipts for the remaining 85% of the asset value that will be determined in future.

Securitisation receipts would mean a guarantee provided by the government in case the bad bank (NARCL) is not able to realise any value of asset. Hence the government would assure stressed bank some amount of realisation out of Rs.30, 600 crore guarantee announced by the cabinet, valid for 5 years. The banks will have to pay a guarantee fee starting with 0.25% which will keep increasing to encourage speedy disposal of these assets.

Private ARC’s (Asset Reconstruction Company) do exist in the financial system but they cater to small to mid-sized loans and do not take up big ticket loans. Hence a government backed securitisation receipts (SRs) has become the need of the hour.

NARCL is a state run company with 51% stake of state owned banks while the private owners hold the rest of the stake. RBI yet needs to give a nod to operate this entity. Lenders have started completing their process of identifying toxic assets with NARCL.

The stressed assets that are bought by NARCL has been incorporated under the Companies Act and will be managed by another entity called India Debt Resolution Co. Ltd (IDRCL) for the resolution of the assets that will eventually manage soured assets and engage in turning around market experts that may do some value addition and preserve the value of stressed assets.

NARCL is a challenging work but overall setting up of NARCL should bring some relief to banks so that bank businesses are least impacted thereby freeing up their capital and spur lending in the ecosystem.

Source – RBI Financial Stability Report July 2021

Sectoral Asset Quality –

Source – RBI Financial Stability Report July 2021

There will be close monitoring required over IDRCL-NARCL structure and ensure the bad assets are transferred strictly adhering to the norms.

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Criti Mahajan
An MBA graduate in finance with 5 years of working experience in the financial services space. An enthusiastic research writer inclined towards understanding economics and policy making with an experience of diversified writing on professional platforms in economics. A self-starter, perseverant and an ardent learner.

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