Published: 13th Jun, 2022
Context
Finance Minister Nirmala Sitharaman recently reviewed the progress in setting up of National Asset Reconstruction Company Ltd (NARCL).
About
National Asset Reconstruction Company (NARCL):
- The National Asset Reconstruction Company (NARCL) is a government-created entity to sort out the bad asset problem in India through asset reconstruction process.
- It was incorporated in July 2021 under the Companies Act (with Registrar of Companies) and is waiting for an Asset Reconstruction Company (ARC) license from the RBI.
- India Debt Resolution Company Ltd (IDRCL) is an operational entity of NARCL.
- It will manage the stressed assets acquired by NARCL and try to raise their value for final resolution.
How is NARCL different from existing ARCs? How can it operate differently?
- The proposed bad bank will have a public sector character since the idea is mooted by the government and majority ownership is likely to rest with state-owned banks.
- At present, ARCs typically seek a steep discount on loans. With the proposed bad bank being set up, the valuation issue is unlikely to come up since this is a government initiative.
- The government-backed ARC will have deep pockets to buy out big accounts and thus free up banks from carrying these accounts on their books.
How will the NARCL-IDRCL work?
- The NARCL will first purchase bad loans from banks.
- It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
- When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
- If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
- The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.
How are banks benefited from NARCL?
- Incentivize quicker action on resolving stressed assets
- Help in better value realization
- Helps in freeing up bank personnel to focus on increasing business and credit growth
- Improve banks’ valuation
- Enhance banks’ abilities to raise market capital
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