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The government on Thursday announced a guarantee of up to 30,600 crore, valid for five years, to cover any shortfalls in the redemption by lenders of security receipts issued by our newly-set-up National Asset Reconstruction Company Ltd (NARCL) to buy their stressed loans. Purchases by NARCL, for which the Centre has set a target of 2 trillion worth, will be made at discounts to the original loan values—with 15% cash and mostly IOUs to be settled with money obtained from realizations off those assets. Should NARCL fail to resell dud loans, or extract too little money, then originator banks will not get much out of asset-specific receipts. By covering the gap, the backstop will encourage lenders to accept low upfront money, clean up their books, and do what they must: lend.

Finance minister Nirmala Sitharaman said that since the pool of assets is large, higher value would be realized from some. This is true. However, we are yet to see a proper market emerge for impaired assets in India, and it still isn’t altogether clear how well this state-run exercise will work. It may help, perhaps, to allow market-driven payment flexibility by adopting newly-devised auction formats.

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