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What is Modi govt’s ‘bad bank’ that will buy Rs 2 lakh crore debt, free up lending

National Asset Reconstruction Co. Ltd (NARCL) is awaiting RBI’s nod. It aims to free up bank resources for lending to productive sectors of the economy.

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New Delhi: The Narendra Modi government Thursday released the fineprint of the proposed entity that will acquire stressed assets from bank balance sheets to enable them to lend to productive sectors of the economy.

Finance Minister Nirmala Sitharaman announced that the National Asset Reconstruction Co. Ltd (NARCL), which is loosely referred to as a ‘bad bank’, has received the Union cabinet’s nod and will address the “twin balance sheet” problem faced by the Indian financial sector.

Twin balance sheet problem refers to troubles faced by both banks and Indian companies, leading to a vicious cycle of bad loans for the Indian banking sector.

The Modi government’s decision to set up another asset reconstruction company comes at a time Indian banks are expected to face a deluge of bad loans in the coming years due to the stress caused by the Covid-19 pandemic.

According to projections by the Indian central bank, bad loans as a percentage of total advances could inch up to nearly 10 per cent by March 2022 as against 7.5 per cent in March 2021.

Also read: 77% Indians want petrol & diesel to come under GST, survey finds

What NARCL will do

The NARCL will acquire nearly Rs 2 lakh crore of stressed assets from banks. These will be high value stressed loan assets of more than Rs 500 crore. It will pay banks 15 per cent cash upfront for these assets and issue securitisation receipts for the remaining 85 per cent of the asset value. 

The cabinet approved a Rs 30,600 crore guarantee to back these securitisation receipts. This guarantee will come into play if the asset is not able to realise its value and will be valid for five years.

NARCL, in which state-owned banks have a 51 per cent stake, is currently awaiting the nod of the Reserve Bank of India (RBI) to operate as an asset reconstruction company. 

Parallelly, lenders have completed the process of identifying ‘toxic assets’ that can be transferred to NARCL. The company has also undertaken the valuation of these assets, Financial Services Secretary Debasish Panda said.

The stressed assets acquired by NARCL will be managed by another entity. This company, India Debt Resolution Co. Ltd, will focus on resolution of the assets and employ turnaround professionals.

This will free up bank personnel to focus on lending activities, Sitharaman said.

The minister said that the asset quality review undertaken in 2015 had revealed the stress faced by banks. She added that the Modi government has undertaken many measures to comprehensively address the problems faced by the banking sector, including bringing in Insolvency and Bankruptcy Code, capitalisation of banks and governance reforms.

The Modi government has repeatedly blamed the lending practices followed by banks during the Congress-led United Progressive Alliance’s tenure for the pile up of bad debts seen by banks.

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