Finance Minister: Bad bank to resolve Rs 2 lakh cr stressed loans

New Delhi, September 16

Finance Minister Nirmala Sitharaman on Thursday announced a Rs 30,600 crore government guarantee for National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets, paving the way for operationalisation of the bad bank.

Security receipts

NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent will be government-guaranteed security receipts. — Nirmala Sitharaman, Finance Minister

The decision to provide sovereign guarantee for security receipts (SRs) issued by the NARCL was taken at a meeting of the Union Cabinet headed by Prime Minister Narendra Modi on Wednesday.

The Finance Minister in Budget 2021-22 had announced setting up of a bad bank as part of resolution of bad loans worth about Rs 2 lakh crore.

The bad bank or the NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. The government guarantee will be invoked if there is loss against the threshold value.

“For the SRs to hold on and to have their value intact, there is a need for government to give the backstop arrangement and that’s why Rs 30,600 crore has been cleared by the Cabinet yesterday,” she said. This sovereign guarantee would be for a period of 5 years and the NARCL would have to pay a fee for this. “The SRs are getting the backstop through government funding only in as much as to pay the gap between the realised value (resolution/liquidation) and face value of the SRs and this will hold good for five years,” Sitharaman said.

The fee for the guarantee will be initially 0.25 per cent, which will progressively increase to 0.5 per cent in case of delay in resolution of bad loans, Financial Services Secretary Debasish Panda said.

This will enable speedy disposal of stressed assets and clean up balancesheets of banks for further lending, he explained.

The Finance Minister further said public sector banks (PSBs) would hold 51 per cent stake in the NARCL and 49 per cent in the proposed debt management company — India Debt Resolution Company Ltd.

There would be 16 shareholders for NARCL, including PSBs, private sector banks and NBFCs.

The structure will assist in consolidation of debt, currently fragmented across various lenders, thus leading to faster, single point decision-making, she said.

“It will incentivise quicker action on resolving stressed assets thereby helping in better value realisation. India Debt Resolution Company Limited (IDRCL) will engage market expertise for value enhancement. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth,” she said.

In the first phase, Panda said, banks have identified stress loans of about Rs 90,000 crore to be resolved.

The NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore. — PTI

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