India

Bad bank is open

Relief of Rs 2 lakh crore in five years

Union Finance Minister Nirmala Sitharaman on Thursday announced a government guarantee of Rs 30,600 crore for the establishment of National Asset Reconstruction Company Limited (NARCL), proposed in this year’s budget. This will pave the way for ‘bad banks’ to take possession of bad loans in the country’s banks.

In the next five years, a total of Rs 2 lakh crore of debt-laden assets of banks will be seized through bad banks, which will ease the burden on banks, he said. The sovereign guarantee given to the newly formed NRCL is for a period of five years and the company will have to pay a fee in return, Sitharaman said. When banks acquire their non-performing and sunken assets, in return, NRCL will have to pay cash and guarantee the government through cash. In the event of a fall in the value of these bonds, NRCL has been given a universal guarantee to compensate.

In return for the guarantee, NRCL will initially charge a fee of 0.25 per cent and if it delays the acquisition of bad debts, the fee will be doubled to 0.50 per cent, said Union Finance Secretary Debashish Panda.

After the NRCL accepts the proposal for acquisition of sunken assets of the banks, efforts will be initiated by an independent company, India Debt Resolution Company Limited (IDRCL), for their recovery and redressal. She will be assisted by market experts in this work. Overall, the system will solve a major problem for banks and help them focus on new business growth.

How to relieve the banks?

NRCL will acquire the outstanding loan assets of commercial banks in the country. Debt cases, mainly for recovery of Rs 500 crore or more, will be brought before her. Assuming responsibility for these loans, NRCL will reimburse banks 15 per cent of the loan amount and the remaining 85 per cent of the value of the securities.

Why ‘Bad Bank’?

NRCL was mentioned in this year’s budget as a ‘bad bank’ as a financial institution that helps clean up the balance sheets of other banks and financial institutions by seizing their sunken and distressed assets. NRCL was set up under the Companies Act and has been licensed by the Reserve Bank as an Asset Restructuring Company (ARC). It owns 51 per cent stake in public sector banks, mainly to recover Rs 500 crore or more from these banks.

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