The Union Cabinet has approved Central Government guarantee to the tune of up to Rs 30,600 crores, which would be given to the National Asset Reconstruction Company Limited (NARCL) for a period of five years, Finance Minister Nirmala Sitharaman said on Thursday.
The Cabinet clearance to the government guarantee was given on Wednesday, she told media persons during a press conference.
NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an asset reconstruction company (ARC).
Known as bad bank in common parlance, NARCL has been formed by public sector banks to consolidate all NPAs which will be put up for resolution.
The government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of security receipts issued for that asset, subject to overall ceiling of Rs 30,600 crore, which will be valid for five years.
The main condition for invoking the government guarantee will be faster resolution of stressed assets, official sources said.
Public sector banks will have a majority stake of 51 per cent in NARCL, while the task of managing assets and engaging with market professionals will be undertaken by India Debt Resolution Company Limited (IDRCL), which will be a service company.
IDRCL is in the process of being setting up and the majority stake in it will be with private sector lenders, while public sector banks and public financial institutions will hold up to 49 per cent stake in it.
The Finance Minister said that the government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of security receipts issued for that asset, subject to overall ceiling of Rs 30,600 crore, valid for five years.
Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost, Ms Sitharaman added.
She informed that in 2015, an asset quality review of banks had been conducted, where high incidence of non performing assets (NPA) were revealed.
In the last six years, the government’s strategy of four “Rs”, i.e. Recognition, Resolution, Recapitalisation and Reforms helped in recovering Rs 5,01,479 crores, said Ms Sitharaman.
The NARCL will aggregate NPAs in banks’ balance sheets and manage as well as dispose them of professionally, the finance minister said.
The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.
The NARCL will acquire assets by making an offer to the lead bank and once its offer is accepted, IDRCL will be engaged for management and value addition.
NARCL will enable faster resolution of NPAs, which in turn will help in better value realisation, official sources said.