India’s bad bank gets regulatory nod; ₹50,000 cr to be transferred by 31 March
- The National Asset Reconstruction Company Ltd (NARCL) will acquire and aggregate the identified bad loan accounts from banks, while India Debt Resolution Company Ltd (IDRCL) will handle the debt resolution process under an exclusive arrangement
India’s proposed bad bank has received all regulatory approvals, and lenders plan to transfer at least ₹50,000 crore of toxic assets to it by 31 March, State Bank of India chairman Dinesh Khara said on Friday.
The plan to form a bad bank to clean up banks’ balance sheets was announced in the Union budget last year. 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, the bad bank—the National Asset Reconstruction Co. Ltd (NARCL)—will acquire and aggregate the bad loan accounts from banks, while India Debt Resolution Co. Ltd (IDRCL) will handle the resolution process under an exclusive arrangement.
A total of 38 accounts worth ₹82,845 crore have been identified for transfer to the NARCL.
“The transfer will happen in a phased manner, and in phase one, about 15 accounts aggregating to ₹50,000 crore are expected to be transferred to NARCL. We are trying to have these accounts transferred within this financial year,” Khara said at a press conference to announce details of the bad bank.
Banks had earlier said that ₹2 trillion worth of stressed loans could be transferred. However, a few of these accounts have been resolved in the past year. ₹82,845 crore worth of accounts are those where the joint lenders’ fora have met and decided to transfer them.
J. Swaminathan, managing director of State Bank of India, said that processes are still on in a phased manner for the remaining accounts and that resolutions or transfers will happen over the next year. “The universe of ₹2 trillion was identified on the basis of the ₹500 crore and above cut-off for the banking system being in the stressed assets’ book. So, this book will be dealt with over a period of time—either till it is resolved with the lenders or it gets transferred to NARCL,” said Swaminathan.
IDRCL is expected to improve resolution techniques, preserve value, showcase the brownfield assets and attract investors and alternative investment funds.
“This will maximize value for all stakeholders. It is also expected to free the bandwidth as well as capital for the lending bankers, which can be put to more gainful use,” Khara said.
Seen as a panacea for India’s massive bad loan problem, NARCL was set up on 7 July with an authorized capital of ₹100 crore and has been classified as a “Union government company”. Its creation was part of the government’s efforts to clean up India’s financial system, which is sitting on one of the world’s biggest piles of bad assets. The government hopes that transferring soured loans to NARCL will allow banks to cut their losses and revive lending.
NARCL will identify and acquire assets on a 15:85 cash and security receipt (SR) basis. These SRs will be issued in favour of the transferring lenders and will be secured by a government guarantee for its face value.
While public sector banks have taken a majority stake in NARCL, IDRCL will be majority-owned by private sector banks. “This unique public-private partnership is envisaged to get the best of the talent in terms of the ability to handle the large exposures and have the benefit of aggregation,” Khara said. Domain expertise, he added, “will come in handy to resolve stressed assets.”
Once the bad loans are transferred to NARCL, a trust will be set up for each loan account, and the debt resolution will be handled by IDRCL, which will not carry any balance sheet.
“The balance sheet will be with the NARCL, the licenced asset reconstruction company. So the trust will reside there, SRs get issued from the respective trusts, and for each account, the resolution mandate will be with the IDRCL,” Swaminathan said.
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Business NewsIndustryBankingIndia’s bad bank gets regulatory nod; ₹50,000 cr to be transferred by 31 March
First Published:28 Jan 2022, 03:28 PM IST
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