FM Sitharaman announces a government guarantee of Rs 30,600 crore for "bad bank"

New Delhi, Sept17: The government has approved implementing a guarantee of Rs 30,600 crore to the National Asset Reconstruction Company Ltd (NARCL) to aid in the prompt clearance of the banking sector's stressed assets worth over Rs 2 lakh crore.

 

 

 

In the first phase, NARCL would just get Rs 90,000 crore in stressed assets for which banks have made 100% provisions in their books of accounts.

According to Finance Minister Nirmala Sitharaman, the majority of large-ticket NPAs (Non-Performing Assets) will be transferred to NARCL, cleaning up banks' balance sheets and freeing up growth capital for them to promote economic activity. “…this will result in banks’ balance sheets and books being cleaner, transparent, they will now be able to stand on their own and do business. They have proved it because banks are going out and raising resources (from the market),” she said.

 

NARCL, which is owned 51% by public sector banks, will have an operational entity, India Debt Resolution Company Ltd, to handle these assets and find possible buyers. Banks that transfer stressed assets will receive 15% of the value in cash and the remaining 85% in tradable security receipts. When the assets are eventually sold to prospective buyers, the government guarantee will cover the difference between the face value of the security receipts and the realised value of the assets.

 

 

 

According to Department of Financial Services Secretary Debasish Panda, the guarantee is in the form of a "contingent liability" and does not require any immediate monetary outlay for the Central government. According to him, provisions have been embedded into the framework to assure a quick and time-bound resolution. The guarantee is valid for five years, and the guarantee fee paid to the government by NARCL will increase with each passing year. The guarantee can only be used if the assets are resolved to be liquidated.