The Indian government has decided to set up National Asset Reconstruction Co Ltd (NARCL) to aggregate non-performing assets (NPAs) in banks’ balance sheets and manage and dispose them professionally. "Along with NARCL, we are also setting up an India Debt Resolution Co Ltd (IDRCL)," says Union minister for finance Nirmala Sitharaman.
The Union Cabinet had approved a guarantee of Rs30,600 crore to back security receipts (SRs) issued by NARCL for acquiring stressed loan assets. NARCL proposes to acquire stressed assets of about Rs2 lakh crore in phases within extant regulations of the Reserve Bank of India (RBI). It intends to acquire these through 15% cash and 85% in security receipts.
According to the minister, NARCL is intended to resolve stressed loan assets above Rs500 crore, each amounting to about Rs2 lakh crore. In the first phase, fully provisioned assets of about Rs90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in the second phase, she added.
Explaining the rationale for adopting the route of NARCL for the resolution of stressed assets of banks, the finance minister (FM) says, “NPAs has been sitting in banks for which they have repeatedly been provisioning. Once you take them out, manage, re-evaluate, give them for people to buy, they will fetch a higher value.”
Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals (DRTs), as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought a sharper focus on recovery.
“In spite of these efforts, a substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the asset quality review (AQR) is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution,” the minister says.
Addressing the media, Ms Sitharaman also shared information on banks’ written-off debt and recovery. She says, “Out of the amount of Rs5.01 lakh crore recovered by banks during last six years, Rs99,996 crore comprises amount recovered from written off assets.”
NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. Public sector banks (PSBs) will maintain 51% ownership in NARCL.
IDRCL, on the other hand, is being floated as a service company or operational entity, which will manage the asset and engage market professionals and turnaround experts. PSBs and public financial institutions (PFIs) will hold a maximum of 49% stake in IDRCL, with private-sector lenders holding the balance.
A government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to an overall ceiling of Rs30,600 crore, valid for five years.
The government guarantee will be valid for five years, and the condition precedent for invocation of guarantee will be resolution or liquidation. Further, to disincentivise resolution delays, NARCL has to pay a guarantee fee, which increases over time.
Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost, FM Ms Sitharaman says.