Banks will initially transfer bad loans worth Rs 89,000 crore from 22 large value accounts to the proposed National Asset Reconstruction Company Ltd (NARCL).

An estimated Rs 2 trillion of soured loans is likely to be transferred in tranches to the bad bank, allowing banks to clean up their balance sheets and focus on their core lending activities. NARCL will absorb bad loans of Rs 500 crore and above even as Indian banks are saddled with over Rs 7 trillion of non-performing assets (NPA).

“The Indian Banks’ Association (IBA) has asked lead banks to call for meetings and keep an approval ready so that as soon as the ARC (asset reconstruction company) is formed, they can start the process. I think the assessment in the first phase was for 22 accounts of about Rs 89,000 crore," said Rajkiran Rai G, chairman of IBA and the chief executive of Union Bank of India in a media interaction after announcing the bank’s results.

“These numbers indicate only the accounts where lead banks have been able to hold discussions with other consortium banks, he added. Public and private sector banks will be stakeholders in the new bad bank which is expected to start operations in July.

“The security receipts issued by the NARCL will be guaranteed by the government which may result in an undue advantage for the bad bank vis a vis the other ARCs in the market,” said an executive with a large ARC.

The government had announced the setting up of the NARCL in the Union Budget for 2021-22 to resolve large value accounts that remained on the books of the banks.

“What we have done is a preliminary work to keep the ground ready so that when the ARC is registered, it can take off quickly. We have broadly identified the accounts where there is almost close to 100% provisions and are above Rs 500 crore in exposure," said Rai.

“This ARC will handle assets above Rs 500 crore and the main advantage of the NARCL is debt aggregation. They should be able to take the whole asset so that decision making will be quick," he said, adding that the existing ARCs do not have the capability to buy big assets at the industry level.

Union Bank of India expects to transfer 17 accounts with an exposure of Rs 7,800 crore, of which it is a lead bank in two. Only a handful of banks have so far disclosed the quantum of assets they intend to transfer to the NARCL.

On Saturday, Punjab National Bank said it would transfer Rs 8,000 crore worth of assets. Earlier, Bank of India said it had identified 21 accounts with an exposure of Rs 5,500 crore and Indian Bank estimated a transfer of accounts worth Rs 1,900 crore.

The regulatory approvals for the bad bank, however, are still awaited.