NARCL to help reduce banking stress, kick-start credit cycle: RBI article

The cross-country evidence suggests that if the logistical and financial challenges are carefully navigated, experiments of centralised bad bank can have more hits than misses: RBI article

The establishment of National Asset Reconstruction Company Ltd (NARCL), or bad bank, will help in reducing financial stress on banks and kick-start the credit cycle, according to an article published in the RBI's monthly bulletin on Wednesday.

Evidence world-wide suggests that a centralised bad bank has various systemic benefits, including freeing up banks' resources for more important core operations, positive signalling to investors and customers, avoiding fire sales, and complementing the activities of the existing public and private asset reconstruction companies (ARCs), it said.

The article, titled 'Bad Banks as Good Samaritans: Lessons from Cross-Country Experience for India', is prepared by Snehal S Herwadkar, Arpita Agarwal and Sambhavi Dhingra from banking research division of Department of Economic and Policy Research. The views are of authors and not that of the RBI.

"In the Indian context, the setting up of the National Asset Reconstruction Company Ltd (NARCL), with a clear mandate and an explicit government guarantee, will help in alleviating the financial stress on commercial banks," the authors said.

In her Budget 2021-22 speech, Finance Minister Nirmala Sitharaman had announced that the government intends to set up a bad bank.

NARCL will try to identify and acquire assets on a 15:85 cash and security receipts (SRs).

In September last year, the government had announced a guarantee worth Rs 30,600 crore to security receipts issued by NARCL. The guarantee is valid for five years.

The RBI article said experience of international best practices suggests that NARCL in India is likely to serve as a time-efficient mechanism, while reviving investor interest in primary as well as secondary markets for stressed assets and SRs, respectively.

The cross-country evidence suggests that if the logistical and financial challenges are carefully navigated, experiments of centralised bad bank can have more hits than misses, it said.

NARCL will be an additional mechanism for resolution of large stressed assets, complementing the activities of existing asset management companies, the authors said.

"Going forward, continued commitment, professional staff and transparency in operation will help in making the exercise cost and time effective.

"At the same time, care needs to be taken to ensure that fresh slippages are arrested, and bank balance sheets are strengthened to avoid future build-up of stress," the RBI article said.

The bad bank in India has received all the approvals to commence operations and a total of 38 large stressed accounts worth Rs 82,845 crore have been identified to be transferred to NARCL initially, State Bank of India Chairman Dinesh Khara had said last month.

Of the 38 accounts, 15 stressed accounts worth Rs 50,000 crore are scheduled to be transferred to NARCL by March 2022, he had said.