Dr Debesh Roy, Chairman, InsPIRE
The Union Finance Minister Ms. Nirmala Sitharaman on 16 September 2021 announced that the Reconstruction Company Ltd (NARCL) would be operational soon. The NARCL would ensure resolving bad loans within five years, beyond which the guarantee to be issued by the government would expire.
The Union Cabinet had on 15 September 2021 approved a government guarantee of INR 306 billion (USD 4.15 billion) to be provided for the security receipts issued by the NARCL to buy bad loans of banks. The FM has stated that in many cases, the guarantee need not be invoked as it is reasonable to expect that realization in many cases will be more than the acquisition cost.
The NARCL would acquire assets by making an offer to the lead bank. Once the offer is accepted, India Debt Resolution Company (IDRC), in which PSBs will hold up to 49% stake, will be engaged for management and value addition. The NARCL would resolve stressed loans above INR 5 billion (USD 0.07 billion) each, amounting to about INR 2 trillion (USD 21.14 billion) in phases.
These stressed assets would be acquired by NARCL by paying 15% cash to lenders and the remaining 85% would be paid through security receipts, backed by government guarantee. These security receipts will be tradeable. Fully provisioned assets of INR900 billion are to be transferred to NARCL in the first phase. The new framework will facilitate the freeing up of banking personnel to focus on increasing business and credit growth.
A government guarantee can be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of the security receipts issued for such assets, subject to an overall ceiling of INR 306 billion (USD 4.15 billion). The condition for invoking the guarantee will be either resolution or liquidation.
A major concern is that a proper market for impaired assets is yet to develop in India. However, the new mechanism could allow market-driven payment flexibility by adopting newly-devised auction formats.