Bad Bank Plan | NARCL is a novel approach to address the NPA crisis

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The announcements made by Finance Minister Nirmala Sitharaman on September 16 are interesting, and have a different approach to funding the non-performing assets (NPAs) of public sector banks. Instead of the recapitalisation of the PSBS, the security receipts (SRs) offered by the National Asset Reconstruction Company Ltd (NARCL) are backstopped by government guarantee up to five years for restoration of the loss in the value of the SR.

There is a tacit admission that the funding of more than Rs 3 lakh crore of the PSBs through capital between 2014 and now has not yielded much outcome, and the government will now fund the NARCL by providing 51 percent capital and guaranteeing the SRs for loss of value. This is a neat and less expensive method of cleaning up the balance sheets of the banks.

The larger issue now is the efficacy of the NARCL and its ability to resolve assets. So far, there is no convincing record of effective resolution, and none of the parameters and timetables under regulations have performed. This experiment, therefore, will need focus on the capacity building of resolution and asset managerial skills.

A question that arises now is a way of determining the fiscal deficit and contingent liability of the government for several such guarantees offered under different programmes including the ECLGS 1 and 2 and SME and MSME funding, and the liability that may arise out of today’s announcements.

Ashvin Parekh is Managing Partner, APAS.

Views are personal and do not represent the stand of this publication.