The Union Cabinet has cleared a proposal to provide Rs 30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans, Finance Minister Nirmala Sitharaman said on Thursday
The NARCL proposes to acquire stressed assets of about Rs 2 lakh crore in different phases. It will resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.
Addressing a press conference on the decision, Sitharaman said the approval of guarantee was given in the cabinet meet held on Wednesday. She said asset review of banks had revealed high instance of non-performing assets. She said the government has been undertaking banking reforms since it came to power. In the past six years, banks have recovered over Rs 5 lakh crore, of which Rs 3.1 lakh crore has been recovered since 2018. “In 2018, out of 21 public sector banks, only two were in profit. In 2021, only two are running losses,” Sitharaman said.
Secretary Financial Services Debashish Panda said the NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for licence as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. Public sector banks will maintain 51 per cent ownership in the NARCL.
Apart from the NARCL, the government is setting up IDRCL which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49 per cent stake and the rest will be with private sector lenders.
Addressing the issue of having NARCL-IDRCL type structure when there were already 28 existing ARCs, the government, through ARCs, have been helpful in resolution of stressed assets especially for smaller value loans. However, considering the large stock of legacy NPAs, additional options and alternatives are needed and the NARCL-IRDCL structure announced in the Union budget is this initiative.
The government said the guarantee in form of Rs 30,600 crore will impart credibility and provide for contingency buffers. They will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. “The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. The guarantee will also enhance liquidity of SRs as such SRs are tradeable.”