Eighty large bad loan accounts are likely to move out of banks to seek resolution in the National Asset Reconstruction Company Ltd (NARCL), which is expected to be operational by next month.

NARCL, the name coined for the bad bank announced in the Budget 2021-22, is expected to take in non-performing assets (NPAs) of over Rs 2 lakh crore. This will enable banks to lighten NPAs from their books.

The size of each of these NPA accounts is over Rs 500 crore and the banks have identified about 70-80 such accounts to be transferred to the proposed bad bank, news agency PTI quoted sources as saying.

The company will pick up those assets that are 100% provided for by the lenders.

A bad bank refers to a financial institution that takes over the bad assets of lenders and undertakes resolution.

According to Finance Minister Nirmala Sitharaman, the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

"An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt," Sitharaman had said in her 2021-22 Budget speech.

It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation, she added.

As per the proposal, NARCL will pay up to 15% of the agreed value for the loans in cash while the remaining 85% would be government-guaranteed security receipts.

The government guarantee would be invoked if there is a loss against the threshold value.

Earlier, the Reserve Bank of India (RBI) had said that loans classified as fraud cannot be sold to NARCL. As per the annual report of the RBI, about 1.9 lakh crore of loans have been classified as fraud as of March 2020.

Last month, the RBI decided to set up a panel to undertake a comprehensive review of the working of asset reconstruction companies (ARCs)

After enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable the development of this sector and to facilitate the smooth functioning of these companies.

ARCs have grown in number and size since then but their potential for resolving stressed assets is yet to be realised fully.