India has finally got its very own “bad bank”, with the National Asset Reconstruction Company Limited (NARCL) being officially incorporated, data from the Ministry of Corporate Affairs’s Registrar of Companies showed.
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.
“We have been discussing the NARCL structure with RBI for some time now, and now that NARCL has been incorporated, we will soon be approaching RBI to seek an ARC (Asset Reconstruction Company) licence,” said a person involved in the matter.
While public sector banks are expected to hold a majority stake in NARCL, India Debt Management Company Limited (IDMCL) will likely be majority held by private banks.
All public sector banks led by Canara Bank are in talks to hold an equity stake in NARCL, said one of the people involved in the matter. In an exchange filing earlier, Canara Bank said its board had given in-principle approval to be the lead sponsor of the bad bank, with a 12 percent stake in the entity. Canara Bank has sought RBI’s approval for the same. The other public sector banks and state-owned Rural Electrification Corporation (REC) are also expected to hold under 10 percent stake each.
Private banks may have equity participation in India Debt Management Company Limited (IDMCL), according to two people in the know. “ICICI Bank, HDFC Bank, Axis Bank and IDBI Bank will together hold a significant stake in IDMCL,” this person said, adding that their boards would have to individually ratify the proposal.
NARCL will take over the bad loans from banks by paying 15 percent in cash and 85 percent as Security Receipts. The security receipts will be backed by a government guarantee, which is likely to ensure the face value of the SRs, CNBC-TV18 had earlier reported. The government is expected to provide a guarantee of Rs 31,000 crore for a period of five years for the NARCL.
“Our total capital requirement – if we consider that NARCL will eventually buy more than Rs 2 lakh crores of NPAs from banks- will not be more than about Rs 6,000 crores,” said a person directly involved in the matter. This person added that the bad bank can start operations with a smaller amount of equity capital to begin with. “IDMCL will not need more than Rs 50 crores of capital,” this person added.
CNBC-TV18 had earlier reported that banks had identified Rs 82,496 crores worth of bad loans that could be transferred to NARCL in the first phase. These are across 22 large accounts, which have been 100 percent provided for by banks.
These include names like Videocon’s VOVL (Rs 22532 crores total exposure), Reliance Naval and Engineering Limited (Rs 8,934 crores), Amtek Auto (Rs 9,014 crores), Jaypee Infratech (Rs 7,950 crores), Castex Technologies (Rs 6,337 crores), GTL Limited (Rs 4,866 crores), Visa Steel (Rs 3,394 crores), Wind World India Limited (Rs 3,161 crores), Lavasa Corporation (Rs 1,424 crores), Consolidated Construction Consortium Limited (Rs 1,353 crores), and others.
Most of these are legacy accounts where banks have not had much success with resolutions so far, but are hopeful debt aggregation by NARCL will lead to faster recoveries.
Even after the incorporation of the bad bank, the process of getting the ARC license, setting up the team and start the process of auctions to buy non-performing assets may take a while, and the actual transfer of assets may only happen towards the end of the year, said people quoted earlier.
The bad bank was announced in the Union Budget in February earlier this year and is being driven by banks themselves, with the government agreeing to provide guarantees for the security receipts that will be issued by the NARCL. The Cabinet is yet to clear the proposal for a government guarantee for the bad bank so far.