In a bid to address the problem of non-performing assets (NPAs) resulting in bad loans in public sector banks, Finance Minister Nirmala Sitharaman on Thursday said that the Cabinet cleared the formation of the country’s first ever ‘bad bank’.
The minister announced a government guarantee up to Rs 30,600 crore for security receipts issued by the National Asset Reconstruction Company Ltd (NARCL) as part of the resolution of bad loans.
“The Cabinet has yesterday approved Central Government guarantee up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company Limited (NARCL),” she said.
Sitharaman said that the Budget 2021 had announced the government’s intention to set up an Asset Reconstruction Company (ARC) along with Asset Management Company to consolidate and take over existing stressed debt and thereafter manage and dispose them off to buyers for value realisation.
Addressing the media, she said that banks’ asset quality review had happened in 2015, for cleaning up and fully provisioning bank balance sheets, this revealed very high incidence of NPAs, and added that the government came up with a four-R strategy of Recognition, Resolution, Recapitalisation and Reforms.
After recognition, quantification of NPAs started in a planned manner and recovery too started, Sitharaman said adding that in the last six financial years, the 4Rs were executed meticulously, banks have recovered Rs 5,01,479 crore.
After recognition, quantification of NPAs started in a planned manner, recovery too started
In last 6 financial years, the 4Rs were executed meticulously, banks have recovered Rs. 5,01,479 Crore
– FM @nsitharaman https://t.co/mFiJBMUxbQ
Live Now https://t.co/CrLdhgFv5z— PIB in Maharashtra 🇮🇳 (@PIBMumbai) September 16, 2021
Out of Rs 5,01,479 Crore recovered by banks during last six years, Rs 3.1 lakh crore has been recovered since March 2018, the finance minister said adding that a record Rs 1.2 lakh crore has been recovered in 2018-19 alone.
Out of the amount of Rs 5,01,479 lakh crore recovered by banks during last six years, Rs 99,996 crore comprises amount recovered from written off assets, she said.
Speaking about the recent banking reforms introduced over the past few years, Sitharaman spoke of the managerial reforms, bringing of cooperative banks under the Reserve Bank of India (RBI), supervisory framework for primary co-op banks, Bank Board Bureau, ARCs, strengthening risk management practices and debarring of willful defaulters from capital markets.
Explaining one of the reasons for the level of NPAs, Sitharaman said that large frauds of Rs 100 crore or more have an average lag time of 57 months for fraud detection.
Speaking of the health of the public sector lenders, the finance minister said that in 2018, just two of the 21 public sector banks (PSBs) were profitable and added “I am happy to say that in 2020-21, only 2 reported loss for the year.”
She further said that PSBs are now not only making profits, they are also raising money from the markets, a total of Rs 58,697 crore has been raised by PSBs as debt and equity.
Sitharman said that NARCL will aggregate the 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.
Along with NARCL, we are also setting up an India Debt Resolution Company Limited
PSBs will have 51% ownership in NARCL, while PSBs and public financial institutions will have a maximum of 49% stake
– FM @nsitharaman https://t.co/9X0FmrybYJ
— PIB in Maharashtra 🇮🇳 (@PIBMumbai) September 16, 2021
“Along with NARCL, we are also setting up an India Debt Resolution Company Limited, PSBs will have 51 per cent ownership in NARCL, while PSBs and public financial institutions will have a maximum of 49 per cent stake,” she said adding that 15 per cent cash payment to be made to banks for NPAs based on some valuation, 85 per cent to be given as security receipts.
For security receipts to have their value in tact, the government has to give backstop arrangement, hence the government guarantee of Rs 30,600 crore cleared by Cabinet yesterday, the minister noted.
The government guarantee can be invoked by NARCL for meeting the shortfall between the face value of the security receipt and the actual realisation upon resolution/liquidation.
“Through setting up of NARCL and various other steps taken in recent years, we have in totality addressed the issues facing 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,” she said.
