The cabinet has approved government guarantee for National Asset Reconstruction Company Ltd (NARCL) and Finance Minister Nirmala Sitharaman will hold a press conference at 5 pm today on the same.
She is likely to announce a government guarantee of up to Rs 31,000 crore for the bad bank--NARCL.
Government guarantees required for security receipts have been issued by ARC against bad loans. They can avoid the huge recapitalisation of NARCL.
Now, government is expected to give guarantees for 5 years on Security Receipts (SRs) and make them tradable. ARCs will give 15 percent cash, 85 percent SRs to banks in lieu of bad loans.
The security receipts will be backed by a government guarantee, which is likely to ensure the face value of the SRs.
According to Sonam Chandwani, the Managing Partner at KS Legal & Associates, the Cabinet approval will pave the road for NARCL's operationalization.
"With banks still cash-strapped, the central bank's support would indeed rescue bad banks. Transferring bad loans to the National Asset Reconstruction Company Ltd will undoubtedly put an end to the bad loan scourge. The implementation of a fee for bad asset management by the NARCL would not only incentivize efficient asset management but would also close the loop from the banks' perspective," she said.
CNBC-TV18 had earlier reported that the Indian Banks Association (IBA) had filed an application with the Ministry of Corporate Affairs (MCA) to incorporate both the asset reconstruction company and its debt management company a few weeks back. While the NARCL was incorporated as of July 7, 2021, the India Debt Management Company Limited (IDMCL) which will manage these bad loans is yet to become a legal entity.