Finance Minister Nirmala Sitharaman
The Union Cabinet on September 16 approved a government guarantee of up to Rs 30,600 crore for security receipts to be issued by National Asset Reconstruction Company Ltd (NARCL). Security receipts represent an undivided right or interest in a financial asset. Typically, asset reconstruction companies or a bad bank buy distressed assets paying 15 percent cash and the balance 85 percent in security receipts.
FM said that in the last six financial years, banks have recovered Rs 5,01,479 crore. Of this Rs 3.1 lakh crore have been recovered since March 2018. Sitharaman added that the government guarantee will give more confidence to lenders to sell their assets to NARCL.
Addressing a press conference in the national capital, the FM said, “We are also setting up an India Debt Resolution Company Ltd to manage the Non-Performing Assets (NPAs). In this company, public sector banks (PSBs) and state-owned financial institutions will own 49% stake.” She added that private sector banks will also hold a stake.
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“A 15 percent cash payment will be made to banks for their toxic assets, 85 percent will be security receipts. There will be a backstop guarantee for the banks,” the FM said. Sitharaman added that the security receipts provide backstop funding, which will be good only for five years.
“There is an incentive for speedy disposal of these non performing assets,” she said. The government guarantee effectively offers to pay the difference between the face value and realised value of the security receipts issued by NARCL. If the realised value is higher than the face value, then the gains too would accrue to the banks.
“Through setting up of NARCL and various other steps taken in recent years, we have in totality addressed the issues facing the Indian banking sector, which was in 2015 staring at us with twin balance sheet problem, We now have a way of resolving the stressed assets,” The FM said.
Financial Services Secretary Debashish Panda said that the five-year limit will encourage banks to not drag the process, adding NARCL has already been incorporated as a company. He said Rs 90,000 crore worth of NPAs will be transferred to the NARCL in the first phase.
Earlier on September 15, the Union Cabinet approved the proposal to formalise sovereign backing for the securities receipts issued by the NARCL. This would further lead to operationalisation of NARCL.
The Finance Minister in her 2021-22 Union Budget Speech had announced the setting up of a ‘bad bank’. “An asset reconstruction company and asset management company would be set up to consolidate and take over the existing stressed debt,” she had said.
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A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution. The government is planning to take on non-performing assets from their books through the planned ‘bad bank’.
According to previous reports, the NARCL would buy bad loans at 15 percent cash and the remaining 85 percent would be in security receipts guaranteed by the government.
Banks and non-banking financial companies (NBFCs) in India have been accounting for non-performing assets (NPA)—loans where repayment installment has not been made for over 90 days since the due date for several years now, but now the problem is becoming more widespread as many people are struggling to repay loans due to the COVID-induced slowdown in small and medium businesses, and job losses.
At the end of June, the gross NPA level of the banking system was 7.5 percent and the capital adequacy level was around 16 percent.
A recent Assocham-Crisil joint study had said that banks’ gross non-performing assets (GNPAs) are likely to exceed Rs 10 lakh crore by March 2022. According to S&P Global Ratings, stressed assets of Indian banks will remain elevated at 11-12% in fiscal 2022.
The agency expects non-performing loans plus restructured assets to increase to 11.5% in the current fiscal from 8.7% a year ago. It also expects banks’ performance to be affected in the first half of the fiscal due to the impact of the second wave.