The government has set an ambitious plan for the country’s first bad bank, which will get to handle Rs 2 trillion of soured assets offloaded by banks over the next five years. In order to impart credibility and provide for contingency buffers, the government will provision Rs 30,600 crore guarantee to back security receipts (SRs) issued by the newly constituted National Asset Reconstruction Company Ltd (NARCL). 

Addressing the media, Finance minister Nirmala Sitharaman said in the first phase Rs 90,000 crore of bad loans is expected to be transferred to NARCL. The remaining of about Rs 2 trillion of stressed assets will shift in phases. NARCL will acquire these through 15% cash payment to banks while 85% will be given as SRs.

A government guarantee of Rs 30,600 crore, which was cleared by Cabinet on Wednesday, is needed so that SRs have their value intact. Since the resolution mechanism deals with a backlog of non-performing assets (NPAs), a backstop from the government is required, the minister noted.

The government guarantee can be invoked by NARCL to cover the shortfall between the face value of the SR and the actual realisation upon resolution or liquidation. GoI’s guarantee will also enhance liquidity of SRs as these are tradable.

The government’s drive will help to clean up banks’ balance sheets. NARCL, which has applied to the Reserve Bank of India for licence as an asset reconstruction company (ARC), has been set up to aggregate and consolidate high value stressed assets above Rs 500 crore for their resolution. The public sector banks will have 51% ownership in NARCL.  

The government has also registered India Debt Resolution Company Ltd (IDRCL), which will be 49% owned by public sector banks and public financial institutions while the rest will be with private sector lenders. While NARCL will acquire stressed assets, IDRCL will manage them asset professionally with turnaround experts and raise institutional funding through alternate investment funds (AIFs). 

When the banks’ asset quality review took place in 2015 for cleaning up and fully provisioning bank balance sheets, it was found that there was a high incidence of NPAs and the government came up with a four-R strategy of Recognition, Resolution, Recapitalisation and Reforms. After recognition, quantification of NPAs started in a planned manner and recovery too started. In the last six financial years, the 4Rs were executed meticulously and banks have recovered Rs 5,01,479 crore, Sitharaman said, adding that Rs 99,996 crore of this has come from written-off assets. 

Out of Rs 5,01,479 crore recovered by banks during last six years, Rs 3.1 lakh crore has been recovered since March 2018. A record Rs 1.2 lakh crore has been recovered in 2018-19 alone, Sitharaman said. 

According to a joint study by Assocham and Crisil, Indian banks’ gross NPA is likely to be over Rs 10 lakh crore by March 2022 due to slippages in retail, MSME accounts and some restructured assets. 

“By setting up NARCL and taking various other steps in recent years, we have in totality addressed the issues facing the banking sector which were staring at us in 2015 with twin balance sheet problem. We now have a way of resolving the stressed assets,” Sitharaman said.