Union Finance Minister Nirmala Sitharaman, on Thursday, announced that the government will provide Rs 30,600 crore in guarantees to National Asset Reconstruction Company Ltd. to buy bad loans from banks.
The NARCL will purchase bad loans from banks under a 15:85 structure, where it will offer 15% of the net asset value in cash and issue security receipts for the rest. A part of these security receipts will be guaranteed by the government.
This, Sitharaman said, would help clean-up the books of banks. The assets being transferred to the NARCL are those against which full provisions have been made, she added. For the government, this will act as a contingent liability and won’t add to the fiscal deficit immediately, Sitharaman added.
The NARCL is India’s version of the bad bank which aims to consolidate bad loans from lenders and resolve them through a debt management company. The debt management company will be fully owned by NARCL and will be managed by private sector professionals who will oversee the management and resolution of stressed assets.
BloombergQuint had previously reported that 16 lenders, including 12 public sector banks and four private banks, will hold equity stake in NARCL, where Canara Bank will be the sole sponsor with a 12% stake.
The bad bank has applied for an ARC licence with the Reserve Bank of India, so it can start purchasing bad loans. Once the NARCL receives the RBI’s licence, it will start with buying the 22 stressed accounts shortlisted by banks for sale in the first phase.
The total banking sector exposure to these accounts stands at over Rs 82,000 crore. This list includes large corporate accounts such as Videocon Oil Ventures Ltd., Amtek Auto Ltd., Castex Technologies Ltd., Jaypee Infratech Ltd. and Reliance Naval & Engineering Ltd., BloombergQuint had reported in June. These are accounts are fully provided for, which will help banks sell them without any haircuts or further provisioning.