Home >Industry >Banking >FM Sitharaman may announce details of central support for proposed bad bank

NEW DELHI: Finance minister Nirmala Sitharaman on Thursday will likely announce government guarantee of up to Rs31,000 crore for the bad bank--National Asset Reconstruction Company Ltd (NARCL)--which has been set up to resolve the menace of bad loans plaguing public sector banks.

According to reports, the Union Cabinet on Wednesday approved a proposal that requires the government to guarantee security receipts (SR) issued by NARCL, when buying non-performing assets (NPAs) from banks. The guarantees will come as contingent liability which will not involve immediate cash outflow from the government exchequer.

NARCL was incorporated in Mumbai in July and the Indian Banks Association (IBA) moved the Reserve Bank of India for a licence to set up a Rs6,000 crore bad bank. Banks will initially transfer 22 bad loan accounts worth 89,000 crore to NARCL. The aggregate amount of bad loans likely to be transferred in tranches is estimated at 2 trillion.

Lenders sell stressed loans to asset reconstruction companies (ARCs) at a discount, either in exchange for cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers a specific loan. That apart, ARCs charge an asset management fee of 1.5-2% of the asset every year. The government guarantee will help the NARCL decide how much lenders would have to cough up as management fee every year.

In her FY22 budget speech, Sitharaman had said the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the banks' books. 

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realisation," the minister had said.

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