India’s bad bank aims at 2 trillion stressed assets by September

As of March end 2024, NARCL has acquired 18 accounts with outstanding loans of  ₹92,500 crore.
As of March end 2024, NARCL has acquired 18 accounts with outstanding loans of 92,500 crore.

Summary

  • This would complete the target set by the government for the bad bank set up in 2021

New Delhi: India’s bad bank or the National Asset Reconstruction Company Ltd (NARCL) aims to take over 2 trillion worth of banks’ stressed or non-performing assets (NPAs) by the end of September, two persons aware of the plan said.

This would complete the target decided by the government for the new bad bank set up in 2021 to clean up the books of banks by offering cash (about 15% of the sum) and government-guaranteed security receipts (about 85%). 

As of March-end 2024, NARCL had acquired 18 accounts with outstanding loans of 92,500 crore.

“By March, the asset reconstruction company (ARC) had already acquired stressed loans of close to 1 trillion and with a pipeline of about three dozen accounts where due diligence process has already been initiated, the acquisition of 2 trillion stressed assets from banks and financial institutions may be completed well before the end of 2024 calendar year, probably by September-end itself," said one of the two persons quoted above.

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NARCL has about a dozen accounts with assets worth 30,000-40,000 crore where the process of acquisition has either been initiated or will be soon. In addition, 23 other accounts have been identified with rural exposure of 60,000 crore.

Queries sent to the finance ministry and NARCL remained unanswered till the press time.

Guarantees may not be invoked

With over 1 trillion of stressed assets proposed to be taken over by NARCL in FY25, it would account for a significant portion of over 1.7 trillion of the total bad loans anticipated in FY25. 

However, the finance ministry has clarified that its guarantee (for security receipts) covering bad loans is unlikely to be offered for the entire amount. The government has agreed to provide security receipts worth only 30,600 crore for the takeover of bad loans.

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The plan to form a bad bank to clean up banks’ balance sheets was announced in the Union budget 2021-22 for taking up large loans amounts of over 500 crore. But it suffered from delays after the Reserve Bank of India said it was unhappy over the proposed structure. Lenders then presented a revised proposal to the regulator.

Under the new structure approved by the regulator, NARCL will acquire and aggregate the bad loan accounts from banks, while India Debt Resolution Co. Ltd (IDRCL), another entity, will handle the resolution process under an exclusive arrangement.

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A major chunk of stressed acquisition in FY25 may come in the form of banks transferring a 18,000 crore debt of real estate firm Jaiprakash Associates (JAL) to NARCL) at a heavy discount. This would be the largest debt acquisition from a single entity by the bad bank. 

However, this transfer is awaiting approval from the RBI, the persons quoted above said.

Resolving distressed loans

NARCL is currently in the process of resolving distressed loans related to several entities including Jaypee Infrastructure, Meenakshi Energy, Mittal Corporation, Rainbow Papers, Helios Photo, SSA International, Zion Panvel Tollway and Consolidated Construction, Coastal Energren, Rolta, McNally Bharat Engineering, Pioneer SAS Power, and Pink City Expressway, Haridwar Highway, SEW Krishnagar Baharampore Highways, Dharani Sugars, Madurai Tuticorin Expressway and Seya.

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Bad banks are assets reconstruction companies which buy bad loans of commercial banks, manage them, and sell in the market and recover the money to liquidate the transferred assets. 

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