Explained: All you need to know about NARCL or bad bank

NARCL will be starting with total capital of Rs 6,000 crore; it was incorporated in Mumbai in July 2021.

Indian Banks’ Association chief executive Sunil Mehta said on October 4 that the National Asset Reconstruction Company Limited (NARCL) has received a license from the Reserve Bank of India (RBI), enabling it to start operations as a so-called bad bank, an entity formed to take over and dispose of the identified stressed assets worth Rs 2 lakh crore of commercial banks.

IBA has been entrusted with setting up of the bad bank, for which the association has put in place a preliminary board.

Moneycontrol explains how NARCL will help clean up the balance sheets of banks and dispose of the mountain of bad loans.

Q. What is the role of NARCL?

Under the new framework, banks will aggregate and consolidate stressed assets with NARCL for resolution. Public sector banks will hold 51 percent ownership in NARCL.

NARCL will acquire fully provisioned stressed assets by making an offer to the lead bank in a consortium of lenders; once the offer is accepted, NARCL will engage with India Debt Resolution Company Ltd. (IDRCL) for management and resolution of the stressed assets. In IDRCL, private entities will maintain 51 percent ownership, with the government holding the rest.

Q. What is the structure of NARCL?

NARCL will be starting with total capital of Rs 6,000 crore; it was incorporated in Mumbai in July 2021.

NARCL has hired PM Nair, a stressed assets expert from State Bank of India, as managing director. IBA chief executive Mehta, SBI deputy managing director SS Nair and Canara Bank’s chief general manager Ajit Krishnan Nair are other members of the board.

SBI, Union Bank of India and Indian Bank have picked up a 13.27 percent stake each in NARCL. Punjab National Bank has acquired a 12 percent stake.

Q. How will NARCL acquire bad loans?

NARCL will acquire stressed assets of about Rs 2 lakh crore in a phased manner. The stressed assets will be acquired through a 15 percent upfront cash payment and 85 percent in the form of security receipts.

On September 16, the cabinet cleared the proposal to provide a government guarantee worth Rs 30,600 crore to security receipts issued by NARCL. The difference between the face value of the stressed asset from the realised value from the sale or liquidation of assets represent the guarantee offered by the government.

The guarantee will be valid for a period of five years.

Under the process, the lead bank will go for the so-called Swiss Challenge form of public procurement in which other asset reconstruction companies will be invited to make offers to find the higher valuation of the stressed assets on sale.

The assets for sale will have been fully provided for by banks on their books. Banks have so far identified 22 bad loans amounting to Rs 90,000 crore which will be transferred to NARCL in the first phase.

Q. What will IDRCL do?

IDRCL is a service company/operational entity established to manage the stressed assets and engage with market professionals including turnaround experts. Public sector banks and state-owned financial institutions will own a 49 percent stake in the entity and the rest by private sector lenders.

Stressed assets acquired by NARCL will be managed by IDRCL for price discovery and value addition.