Govt to give ₹30,600 cr sovereign guarantee for security receipts issued by NARCL
The plan aims to ease stress on state-run banks by freeing up capital, help spur lending
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The government seeks to dispose of ₹2 trillion worth of bad loans in next five years and has provisioned ₹30,600 crore guarantee to back security receipts issued by the newly constituted National Asset Reconstruction Company Ltd (NARCL) against the stressed assets.
Addressing a press conference after the Cabinet cleared the proposal on Wednesday, Finance minister Nirmala Sitharaman said NARCL proposes to acquire stressed assets of about ₹2 trillion in phases with the first phase involving ₹90,000 crore of bad loans expected to be transferred to NARCL. “It intends to acquire these through 15% cash and 85% in Security Receipts (SRs)," she said.
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 the specific loan.
Sitharaman said government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to overall ceiling of ₹30,600 crore, valid for 5 years. “Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost," she added.
NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate high value stressed assets above ₹500 crore for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
Finance ministry in a statement said a government guarantee is needed because resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from government. “This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to ₹30,600 crore will back Security Receipts (SRs) issued by NARCL. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable," it added.
Government has also registered India Debt Resolution Company Ltd. (IDRCL) which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders. “The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition," the finance ministry said.
Sitharaman said while existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans, however, considering the large stock of legacy NPAs, additional alternatives such as NARCL-IRDCL structure was needed.
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 bank 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 realization."
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