Union Cabinet clears decks for National Asset Reconstruction Company

Approves government guarantee on security receipts that will be used to buy bad loans of lenders

Clearing the path for the launch of National Asset Reconstruction Company (NARCL), the Union Cabinet is learnt to have approved the government guarantee on security receipts that will be used to buy bad loans of lenders. The Centre has earmarked about Rs 31,000 crore towards this.

The guarantee provided by the Centre would be on the security receipts issued by the NARCL to buy bad loans from lenders. Banks will transfer their soured assets to NARCL at net book value. About 15 per cent would be paid in cash up front and 85 per cent through security receipts, guaranteed by the government.

A formal announcement is expected as early as Thursday, said an official.

According to the Indian Banks’ Association (IBA) estimates, the NARCL will have to pay a fee to the government for the guarantee provided from the second year of its incorporation, which would be 0.25 per cent of the outstanding guarantees, the official said. The fee would increase to 0.5 per cent, 1 per cent, and 2 per cent in the third, fourth, and fifth years, respectively.

After this approval, the NARCL now awaits a green signal from the Reserve Bank of India (RBI) for a licence, another official said. The NARCL, dubbed a bad bank, has applied for an asset reconstruction company (ARC) licence with the RBI, he added.

EASING THE BURDEN

• Centre has earmarked about Rs 31,000 cr towards guarantees for NARCL 
• Banks to transfer soured assets to NARCL at net book value
• 15% would be paid in cash upfront and 85% via security receipts, guaranteed by government 
• Formal announcement expected Thursday

The NARCL has been incorporated in Mumbai following its registration with the Registrar of Companies (RoC). The capital requirement of the bad bank has been estimated at Rs 6,000 crore by the IBA, which has been tasked with setting up the entity. It has mobilised an initial capital of Rs 100 crore as mandated by the regulator.

The NARCL has identified about 25 accounts that will be transferred. However, a final decision on this is expected to be taken soon after the bad bank starts operations.

The IBA has also reportedly put a preliminary board in place for NARCL. The ARC has hired P M Nair, an expert on stressed assets from State Bank of India (SBI), as the managing director. The other directors are the IBA’s Chief Executive Officer Sunil Mehta, SBI Deputy Managing Director S S Nair, and Canara Bank’s Chief General Manager Ajit Krishnan Nair.

Besides NARCL, the Indian Asset Management Company (IAMCL) is also being set up to provide asset management services to the bad bank. The IAMCL is proposed to be an asset light model with a total capital requirement of Rs 50 crore.

Union Finance Minister Nirmala Sitharaman had announced in the 2021-22 Budget that an ARC and AMC would be set up to consolidate and take over the existing stressed debt of banks to clean up their books.