Bad Bank security receipts to get Centre’s backing of ₹30, 600 crore

The National Asset Reconstruction Co. Ltd (NARCL) is being established as a bad bank to take over non-performing assets, allowing banks to focus on their core business of lending. State-run financial institutions led by Canara Bank will hold a 51% stake in NARCL.

“The union cabinet on Wednesday cleared a proposal to provide government guarantee to security receipts issued by National Asset Reconstruction Co.,” Sitharaman told reporters.

NARCL will acquire stressed assets of about ₹2 lakh crore in phases starting with ₹90,000 crore in bad debt. It will pay up to 15% of the agreed value for the nonperforming assets (NPAs) in cash to public sector banks while the remaining 85% will be offered as securities receipts (SRs).

Bid to Give Comfort to Lenders

These will be redeemed from the amount realised after resolution of the bad debt.

The government has stepped in with a guarantee to give comfort to the lenders. It will meet the shortfall between the value of SRs and the amount realised from resolving the underlying NPA.

“The SRs are getting the backstop through government funding only inasmuch as to pay the gap between their realised value and face value and this will hold good for five years,” she said. The fees that NARCL will pay to the government for such guarantees will go on increasing, incentivising the speedy disposal of assets. The guarantee fee will start at 0.25% and rise every year.

Financial services secretary Debashish Panda said there will be a contingent liability on the government on account of the ₹30,600 crore guarantee but no immediate fiscal requirement is seen at this time.

NPA Resolution

The finance minister observed that private sector asset reconstruction companies (ARCs) do not take up big-ticket asset resolution.

“They hesitate to come in for that kind of a number, therefore there is a need for government-backed SRs to be given,” she said. The guarantee helps in keeping the face value intact and also lends credibility to the exercise so the valuation will be better when it’s realised.

“Actually, when it’s sold off, the gap may not be there or very small, so it (guarantee) may not be invoked in every instance,” she said.

The finance ministry noted in a statement that the condition for invoking the guarantee will be resolution or liquidation.

“GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable,” it said.

NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, India Debt Resolution Company Ltd. (IDRCL), set up along with NARCL, will be engaged for management and value addition. State-run financial institutions will hold a 49% stake in IDRCL.

Better Realisation

Sitharaman said this will free bankers to engage in their core competence of lending as they won’t need to hunt for the best buyer of bad debt or negotiate with them as that will now be done by those with knowledge of, and experience in, the field.