The bad bank declared in the Budget 2021-22, known as the National Asset Reconstruction Company Ltd. (NARCL) is scheduled to open in June. A bad bank is a financial entity that takes over a lender’s bad assets and resolves them. Indian Banks’ Association Chief Executive Officer (CEO) Sunil Mehta said the new organisation is being established in collaboration with both, public and private sector banks. “Various preparatory work is currently underway and we anticipate that it will be operational by the end of the month.” The aggregation of established NPAs will be NARCL’s biggest benefit (non-performing assets). “This is supposed to be more effective in recovery because it will move into the shoes of many lenders who currently have various compulsions when it comes to resolving a bad loan.” he said.
According to Mehta, NARCL will take over reported bad loans from lenders. He went on to say that the lead bank with the NARCL offer would launch a ‘Swiss Challenge’, in which other asset reconstruction players will be invited to improve the offer, offered by a chosen bidder in order to find a higher value of an NPA on the market. He went on to say that the company would take over assets that were fully financed by the lenders. In Budget 2021-22, the Finance Minister Nirmala Sitharaman stated that public sector banks’ high provisioning of stressed assets necessitates measures to clean up their books. In her Budget speech, she said, “An Asset Reconstruction Company Limited and an Asset Management Company will be formed to consolidate and take over the current stressed debt.” She went on to say that it would then maintain and sell the assets to alternative investment funds and other potential buyers for eventual value realisation. IBA proposed the creation of a bad bank last year, in order to quickly resolve non-performing assets (NPAs). The proposal was approved and the government chose the asset reconstruction company (ARC) and asset management company (AMC) models.
NARCL would also pay up to 15% of the agreed-upon loan value in cash, with the remaining 85% being government-guaranteed security receipts, according to Mehta. If there is a loss against the threshold value, the government guarantee will be used, he said. Loans listed as fraud cannot be sold to NARCL, according to the Reserve Bank of India (RBI). According to the RBI’s annual report, about 1.9 lakh crore of loans were listed as fraudulent as of March 2020. The RBI agreed last month to set up a panel to conduct a thorough analysis of asset reconstruction companies’ operations, in order to make their operations more effective. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was passed in 2002, and regulatory guidelines for ARCs were released in 2003 to help the sector grow and run smoothly. Although ARCs have increased in number and size since then, their capacity for resolving stressed assets has yet to be fully realised.
