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Banks' bad loan books to get cleaner with proposed bad bank framework, says experts

NARCL will aggregate NPAs in banks' balance sheets and manage and dispose of them professionally, thus cleaning up banks' balance sheets, said Finance Minister Nirmala Sitharaman.

September 16, 2021 / 09:27 PM IST

On September 16, Finance Minister Nirmala Sitharaman announced the setting up of a sovereign guarantee of up to Rs 30,600 crore for security receipts which will be issued by National Asset Reconstruction Company Limited (NARCL). NARCL will be taking over aggregated stressed assets and the proposed AMC will manage and dispose of them to buyers to realise the value of stressed assets, she said.


The proposed India Debt Resolution Company Ltd (IDRCL) with PSU Banks owning 49 percent of stake will be managed by professionals for management and resolution of stressed assets.


NARCL will be aggregating bad loans from banks under a 15:85 structure where 15 percent of the net asset value will be offered in cash and the rest in security receipts. FM said a part of the security receipts will be backed by the government.


The guarantee represents the difference between the face value of the assets and realized value from sale or liquidation of the assets. In the first phase, stressed assets worth Rs 90,000 crore out of identified Rs 2,00,000 crore worth stressed assets will be transferred to NARCL.


The banks will be transferring the assets to NARCL against which full provisions have been made.


Banks books to get cleaner


Experts say that the proposed move will strengthen the banks' books.


Anil Gupta, Vice President & Sector Head - Financial Sector Ratings, ICRA said, “The upfront cash payment by NARCL to banks will immediately be accretive for the profitability and capital of the banks.”


Gupta adds, “However, the ability of the NARCL to resolve these assets in a time-bound manner will be critical for future provision writeback by banks. We need to see how NARCL raises this cash of ~40-50 billion to be paid upfront to the banks.”


This is a good and robust step as far as the banking system is concerned and a structured way to treat bad assets, said Ashok Paranjape, Managing Partner at MDP Partners.


According to Paranjape, If banks get 15 percent upfront, the amount will be huge as compared to some instances where the entire procedure of NCLT route happens, lenders have got single digit recovery.


Debasish Panda, Finance Secretary in the press briefing said, “Banks are more interested and raring to go as they want to recover their money.


NARCL License Approval Expected Soon


Indian Banks’ Association (IBA) had sought a license from RBI to set-up a Rs 6,000 crore National Asset Reconstruction Company (NARCL). NARCL was incorporated in July post the registration with the Registrar of Companies (RoC).


According to reports, Padmakumar M Nair, CGM of Stressed Assets Resolution Group at SBI will be the head of the NARCL.


Once RBI license is received, NARCL can be swiftly operationalized. It would be interesting to watch how other existing ARCs would compete with NARCL considering NARCL is armed with a sovereign guarantee, Ashish Pahariya, Associate Partner at DSK Legal said.


The limited scope of the sovereign guarantee (i.e. loans with full provisioning done) may probably come to the rescue of other ARCs to help them in competing with NARCL, Pahariya added.


NARCL operations will also create a shelf of monetizable assets, and these can be leveraged by NARCL’s AMC for de-risking, and creating value for both O&M entities and their lenders, said Davinder Sandhu Chairman and Co-founder, Primus Partners.


It is hoped that NARCL will be a lean and professionally managed structure, essential to give comfort to private lenders who are expected to bring in 49% into NARCL funding, Sandhu added.


On the management, Panda said, “We will have some government oversight to provide any support needed but the management will be fully professional.”

ARC license is in the process of being issued by RBI, Panda said.

Ishan Shah
first published: Sep 16, 2021 09:27 pm

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