Nirmala Sitharaman lays out ‘bad bank’ blueprint with govt guarantee worth Rs 30,600 crore

The Union Cabinet has approved a crucial plan for setting up the National Asset Reconstruction Company Limited (NARCL) — also known as the ‘bad bank’. It is aimed at reducing non-performing assets (NPA) of public sector banks.

Finance Minister Nirmala Sitharaman addressed a press conference on Thursday where she said the cabinet has approved a central government guarantee of up to Rs 30,600 crore for Security Receipts that will be issued by the NARCL to public sector banks with NPAs.

“The Union Cabinet yesterday approved Central Government guarantee up to Rs 30,600 crores to back Security Receipts to be issued by National Asset Reconstruction Company Limited,” said Finance Minister Nirmala Sitharaman.

The plan to set up a ‘bad bank’ was first announced during Budget 2021 when the government said it plans to set up an Asset Reconstruction Company (ARC) along with an Asset Management Company to consolidate and take over existing stressed debt from public banks, manage them and sell them off to buyers for value realisation.

Sitharaman said an asset quality review of banks was conducted in 2015, and it revealed a high incidence of non-performing assets (NPAs).

The government then came up with a ‘4R’ strategy of Recognition, Resolution, Recapitalisation and Reforms. “After recognition, quantification of NPAs started in a planned manner, recovery also started. In the last 6 financial years, the '4Rs' were executed meticulously, banks have recovered Rs. 5,01,479 crore,” the finance minister said.

Out of Rs. 5,01,479 crore, over Rs 3 lakh crore was recovered starting March 2018. This indicates that public sector banks gradually started recovering roughly four years ago. She went on to say that only two of the 21 public sector banks were profitable in 2018 and in 2021 only two have reported losses for the full year.

Elaborating on how the NARCL will function, Nirmala Sitharaman said, “NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.”

She went on to say that the guarantees can only be involved by banks on resolution or liquidation of said assets. The guarantees will be valid for 5 years. “Government guarantees will be valid for up to five years. This will ensure a timely resolution of assets,” Nirmala Sitharaman said.

It may be noted that the NARCL will take up bad loans from lenders worth Rs 2 lakh crore, of which Rs 90,000 crore will be transferred in the first phase.

Along with the NARCL, the government will also set up an Indian Debt Resolution Company, said the finance minister. It may be noted that public sector banks will hold a 51 per cent stake in NARCL and a 49 per cent stake in Debt Management Company.