Finance Minister Nirmala Sitharaman today announced the sovereign guarantee of Rs 30,600 crore for security receipts (SRs) to be issued by the National Asset Reconstruction Company Ltd (NARCL), the bad bank for housing Rs 2 lakh crore non-performing loans. The bad bank is still in the process as certain loose ends are yet to be fixed. Here's a list.
NARCL still awaiting an ARC licence
The bad bank's structure is two-layered. It involves an asset reconstruction company named NARCL and a step-down asset management company called India Debt Management Company (IDMCL). NARCL will buy and aggregate the bad loans from various banks, mostly PSBs, while a step-down AMC will do the restructuring, turnaround, and resolution job.
NARCL will be owned 51 per cent by the public sector banks (PSBs) and AMC will have a maximum of 49 per cent stake by the PSBs. The private banks, however, are still to come on board both at the NARCL and AMC. It is likely that the private sector banks will now come as there is clarity on sovereign guarantee against the SRs. Currently, the NARCL is awaiting the RBI licence to start the ARC business.
AMC to manage assets by creating trusts for each NPA
NARCL will buy the bad loans from banks and hand them over to AMC for resolution and restructuring. The equity partners for AMCs are yet to come on board. The AMC will have separate trusts for each non-performing loan (NPA) account bought from the banks. NARCL has identified some Rs 2 lakh NPAs, out of which Rs 90,000 crore will come to the NARCL in the first phase. These Rs 90,000 crore NPAs are fully provisioned in the banks' book of accounts.
Govt guarantee on SRs for better investors interest
NARCL will buy the NPAs from banks by paying 15 per cent upfront cash and balance 85 per cent by way of security receipts (SRs). The government is providing a guarantee on the SRs for 5 years. The idea is to assure the banks that the SRs are secured. In the past, the track record of private ARCs in repaying SRs has been very pitiable. There are some 28 private ARCs , but they generally buy small to medium size loans. "They do not take up big-ticket assets. Therefore, there is a need for government-backed SRs for five years," says Siharaman.
Still awaiting capital from public, private banks
There is no direct capital infusion by the government. NARC has mobilised Rs 150 crore initial capital from eight public sector banks (PSBs). These were Canara Bank, Bank of Baroda, Punjab National Bank, Bank of India, Bank of Maharashtra, SBI, Union Bank of India, and Indian Bank.
The initial capital planned for the NARCL was Rs 6,000 crore to buy the bad loans. But so far, no private sector banks or NBFCs have come forward to be part of the bad bank. The IBA had earlier approached the private sector banks like ICICI Bank, HDFC Bank, and Axis Bank and also public sector NBFCs like Rural Electrification Corp (REC) and Power Finance Corp (PFC). NARCL will have to be infused with adequate capital to buy an entire lot of Rs 2 lakh crore in the next 2-3 years.
Resolution is a big challenge
The resolution of bad loans in five years will be a big challenge. The private ARCs have been struggling to resolve the issues as there has been a lack of interest among buyers. Many of the NPAs have very little value left for getting a good price. The AMC will also need turnaround professionals and experts to revive the assets. The IBC experience also shows the assets generally have very low value as against the debt taken or outstanding to banks in any distressed asset.
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