Deloitte India's Financial Advisory President Uday Bhansali also welcomed this long-awaited establishment of the NARCL and Debt Resolution firm, in line with global practices, to address the Rs 2 trillion debt that is proposed to be aggregated. "A government guarantee for the SRs is vital to support the necessary liquidity for the banks,” he said.
Finance Minister Nirmala Sitharaman on Thursday announced that the Cabinet has cleared the formation of a 'bad bank'. The government will guarantee up to Rs 30,600 crore for security receipts issued by the National Asset Reconstruction Company (NARCL).
The government guarantee, which will be valid for five years, can be invoked by NARCL for meeting the shortfall between the face value of the Security Receipt and the actual realization upon resolution or liquidation. She added 15 percent cash payment will be made to banks for NPAs based on some valuation, and 85 percent will be given as Security Receipts.
Sitharaman also announced that the government is setting up India Debt Resolution company, in which PSU banks will hold a 49 percent stake. "PSBs will have 51 percent ownership in NARCL, while PSBs and public financial institutions will have a maximum of 49 percent stake," she said.
While laying out the framework for bad bank- NARCL, Sitharaman said that the budget 2021 had put forth the intent to set up an ARC (Asset Reconstruction Company) and AMC (Asset Management Company) to consolidate and take over the existing stressed debt and thereafter manage and dispose them off to buyers for value realization.
NARCL will aggregate NPAs in banks' balance sheets (for which full provisioning has been done) and manage and dispose of them professionally, this will thus clean up banks' balance sheets, the minister told reporters.
Sitharaman explained that the guarantee is limited to five years because the idea is to ensure value locked within assets is used making the banking system robust. "So, the limit provides an incentive for banks. If the process is delayed beyond 5 years, guarantee can't be invoked," she said.
She added that through the setting up of NARCL and various other steps taken in recent years, the government has addressed the issues facing the Indian banking sector, which was in 2015 staring at twin balance sheet problem and there is now a way of resolving the stressed assets.
Speaking about the need for security receipts, the finance minister said, "Many Asset Reconstruction Companies are there in the private sector, but they hesitate to take up big-ticket asset resolutions, that is why government backed Security Receipts are required."
Investment firm ICRA has called the setting up of the bad bank a positive stepping stone towards value unlocking of the stressed assets funded by the banks.
ICRA Vice President, Anil Gupta said the ability of the NARCL to resolve the assets in a time-bound manner will be critical for future provision writeback by banks. “We need to see how NARCL raises this cash of 40-50 billion to be paid upfront to the banks," he added.