Bad bank to help monetise chronic NPAs worth ₹2L-cr

NEW DELHI:: Finance minister Nirmala Sitharaman on Thursday announced ₹30,600 in government guarantees that will back the securities issued by the National Asset Reconstruction Company Ltd (NARCL) to acquire bad loans worth ₹2 lakh crore.

NARCL, effectively a bad bank, will buy these loans that are fully provided for by banks; the move will reduce bad loans on the books of banks, Sitharaman said. Of the Rs 2 lakh crore, around Rs 90,000 crore of bad loans will be transferred to NARCL in the first phase of the exercise.

While the bad bank (NARCL) will pay up to 15% of the agreed discounted value of the loans from banks in cash, the remaining 85% will be governmentguaranteed security receipts (SRs), which could be invoked if realisation is less than the agreed threshold value. The guarantee will cover these receipts. The discounted value will be arrived after a valuation process. Finance secretary Debasish Panda said that the valuation of all ₹2 lakh crore of bad loans is complete and that there is a “18% weighted average accorded”. This means the ₹2 lakh crore of bad loans has been valued at ₹36,000 crore.

Of this, 15%, or ₹5,400 crore, will have to be paid in cash. It wasn’t immediately clear how NARCL will raise that money.

NARCL and the Indian Debt Resolution Company Ltd, or IDRCL, are both part of the plans of the government to address the issue of bad loans on the books of banks. The latter will manage the assets and help resolve the debt. The creation of the two, an asset reconstruction company (NARCL) and an asset management company (IDRCL) was announced by the finance minister in her budget speech this year.

NARCL will be liable to pay an annual guarantee fee, Sitharaman said, giving details of

Wednesday’s Cabinet decision that approved the ₹30,600 crore government guarantee. According to finance ministry officials who requested anonymity, the guarantee fee will initially be 0.25% of the amount in the first year and would progressively increase in subsequent years.

It is expected that the asset management company – India Debt Resolution Company Ltd (IDRCL) – will resolve stressed assets worth ₹2 lakh crore in five years.

The bad bank structure will assist in consolidation of debt, currently fragmented across various lenders, thus leading to faster, single-point decision making, including through Insolvency and Bankruptcy Code (IBC) processes, Sitharaman said. “It will incentivise quicker action on resolving stressed assets, thereby helping in better value realisation,” she added.

This approach will also permit freeing up the management bandwidth of banks to focus on increasing business and credit growth, she said. As the holders of these stressed assets and SRs, banks will receive the gains. The government’s guarantee will also enhance liquidity of SRs as these are tradable, officials said.

This basically means banks can sell these down to the market.

Sitharaman said the decision is in keeping with the government’s commitment to reduce non-performing assets (NPAs) of public sector banks (PSBs) through the four “R” strategy -Recognition, Resolution, Recapitalisation and Reform.

Giving the background of the strategy, she said it was a result of an asset quality review of banks that took place for cleaning up their balance sheets in 2015, which revealed very high incidence of NPAs. “Everybody is aware of the story,” she added.

Sitharaman said the strategy worked. “In the last six financial years, banks have recovered ₹501,479 crore... of this ₹3.1 lakh crore has been recovered since March 2018,” she said, adding that recoveries also included “written-off” assets worth ₹99,996 crore from Bhushan Steel and Essar Steel.

The government has also recapitalised PSBs, the finance minister said. In 2017-18, the government infused ₹90,000 crore; ₹1.06 lakh crore was infused in 2018-19. In 2019-20, it infused ₹70,000 crore and in 2020-21, ₹20,000 crore. “In the current budget, we said the government would infuse ₹20,000 crore in this financial year,” she said.

Giving details of reforms in the banking sector, she said several structural and procedural reforms took place in the last six years.

These include bank mergers, managerial reforms, bringing cooperative banks under the Reserve Bank of India (RBI), creation of the Bank Board Bureau, setting up a framework for key performance indicators for banks, strengthening of risk management practices, setting up of new Debt Recovery Tribunals (DRTs) for faster recovery, and action taken against wilful defaulters such as debarring them from accessing the capital market, she said.

“In 2018, only two of the 21 PSBs were profitable, in 2020-21 only two reported loss,” she said. Now banks are so strong that they are also raising money from the market. “Union Bank of India (UBI) raised ₹1,447 crore through a QIP in July 2021. Canara Bank has raised ₹2,500 crore in August 2021. Bank of India announced a QIP for ₹3,000 crore. And State Bank of India’s (SBI) board has approved raising Basel-3 compliant debt of ₹14,000 crore. So, banks are not looking at the government to infuse equity but going to the market for capitalisation,” she said.

Underscoring the need for a bad bank, Sitharaman said one of the reasons why NPAs existed was because bank personnel did not have adequate specialisation in dealing with NPA disposal. “Bank professionals, however, good they are in their professionalism about bankingrelated matters, cannot deal with asset reconstruction. And, therefore, many banks are sitting wondering how to dispose these [stressed] assets. So, banks themselves will feel that it is no more their headache to find the best buyers, negotiate with them and so on... That job is going out to professionals, so banks’ staff will be free to do their basic, original core competence jobs,” she said.

Uday Bhansali, president, financial advisory at consulting firm Deloitte India said establishment of the NARCL and Debt Resolution firm were long awaited and in line with global practices. “A government guarantee for the SRs is vital to support the necessary liquidity for the banks,” he said.

Sanjay Aggarwal, president at PHD Chamber of Commerce and Industry, said, “This will unclog the capital locked in the form of bad assets that can be further leveraged for lending and spending on other priority areas. Since the guarantee is in a form of contingent liability, it will not lead to immediate cash outflow and therefore is unlikely to impact the fiscal position in near future. This initiative will boost investments and unleash the ‘animal spirits’ to strengthen high economic growth.”