Fresh setback for NARCL as two power NBFCs PFC and REC back out

Bad bank unlikely to take up any power assets in the first list

The National Asset Restructuring Company (NARCL), which is still taking shape after almost a year since it was announced, has faced another setback. Sources said the two non-banking financial companies (NBFCs) — Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) — would not invest in NARCL to be shareholders.

NARCL, or bad bank, was announced in the Union Budget last year to take over non-performing assets (NPAs) and facilitate their resolution. In the first phase of its operations, NARCL is slated to take up infrastructure assets with more than 85 per cent provisioning.

Senior officials said the Ministry of Power is of the view that there is no good reason for PFC and REC to invest equity in the NARCL as it is not taking up any power sector assets.

“At least in the first phase, where the NARCL is taking up projects which have more than 85 per cent provisioning, PFC and REC see no investment rationale. There are no power assets in the first list of projects with this high provisioning,” said the official.

The person, however, added that going forward, the two financial ins­titutions might evaluate the possibility of being part of the NARCL. This paper had earlier reported that the two FIs, which primarily have exposure to the power sector, were wary of making equitable contributions to the NARCL’s capital when they were approached to be part of it.

PFC was also approached to be the sponsor of the bad bank, which it had turned down. Later, Canara Bank also declined to be the sponsor.

So far, State Bank of India (SBI), Punjab National Bank (PNB), Union Bank, Canara Bank Bank of Baroda, Indian Bank and Bank of India, and Bank of Maharashtra have picked up stakes in the NARCL.

However, the NARCL is facing delays with no final decision over its structure and is yet to commence operations. The Reserve Bank of India (RBI) had raised concerns on the dual structure proposed for the bad bank. Under the proposal, the NARCL would acquire NPAs from banks and the India Debt Resolution Company (IDRCL) would provide resolutions for them.

The Indian Banks’ Association (IBA) and officials in charge of the NARCL in their dialogue with the RBI are looking for some accommodation in the existing structure.

Thereafter the NARCL proposed that its relation with IDRCL would be a ‘principal-agent’ structure. Officials privy to the developments said SBI has deputed a representative and discussions are being held daily. A resolution is expected soon.

The target of the launch was earlier kept for January, but now it may be pushed by a month, said officials.

The NARCL has pegged its total capital requirement at Rs 6,000 crore. The banks and financial institutions which would be shareholders in the new ARC have been requested to participate in both equity and debt requirements, according to a proposal shared with investors.

The capital cost requirement of the NARCL is based on the acquisition cost of bad loans worth Rs 2 trillion which translates to 20 per cent of the cost, or Rs 40,000 crore. Of this Rs 40,000 crore, the cash required is estimated to be around 15 per cent, or Rs 6,000 crore, while the balance Rs 34,000 crore would be in form of security receipts in the books of banks.

Government officials said the security receipts would be backed by the central government for a period of 5 years up to its face value. On recovery, the NARCL expects to recover between Rs 50,000 crore and Rs 64,000 crore through the resolution of bad loans amounting to Rs 2 trillion. The most likely recovery has been pegged at 28 per cent, or Rs 56,000 crore.