IBA to move application to RBI for setting up bad bank
51% of the NARCL will be owned by PSBs, private sector lenders will own the rest
NEW DELHI: Having secured licence from the Registrar of Companies, the Indian Banks’ Association (IBA) will soon move an application to the Reserve Bank of India (RBI) to set up a ₹6,000-crore National Asset Reconstruction Company Ltd (NARCL) or bad bank, according to sources.
With registration of the company, the process for putting an initial capital of ₹100 crore is on as per the guidelines, the sources said adding that the next step will be audit and then move application to the RBI seeking licence for the asset reconstruction company.
The RBI in 2017 raised capital requirement to ₹100 crore from the earlier level of ₹2 crore keeping in mind higher amount of cash required to buy bad loans.
Legal consultant AZB & Partners has been engaged for seeking various regulatory approvals and fulfilling other legal formalities.
The initial capital would come from eight banks who have committed, and the NARCL would expand the capital base to ₹6,000 crore subsequently after the RBI’s nod, the sources said.
Other equity partners would join after the RBI’s licence and even the board would be expanded, the sources added.
IBA, entrusted with the task of setting up a bad bank, has put a preliminary board for NARCL in place. The company has hired P M Nair, a stressed assets expert from State Bank of India (SBI), as the managing director. The other directors on the board are IBA chief executive Sunil Mehta, SBI deputy managing director S S Nair and Canara
Bank’s chief general manager Ajit Krishnan Nair.
Finance minister Nirmala Sitharaman in Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.
“Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt,” she had said in the Budget Speech. It will manage and dispose the assets to alternative investment funds and other potential investors for eventual value realisation, she had said.
Last year, IBA made a proposal for the creation of a bad bank for swift resolution of nonperforming assets. The government accepted the proposal and decided to go for an asset reconstruction company and asset management company model in this regard.
Meanwhile, state-owned Canara Bank has expressed its intent to be the lead sponsor of NARCL with a 12 per cent stake.
The proposed NARCL would be 51% owned by PSBs and the remaining by private sector lenders.
NARCL will take over identified bad loans of lenders. The lead bank with an offer in hand of NARCL will go for a ‘Swiss Challenge’, wherein other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding higher valuation of a non-performing asset on sale.
The company has picked up those assets that are 100% provided for by the lenders. Banks have identified around 22 bad loans worth ₹89,000 crore to be transferred to NARCL in the initial phase.
The NARCL, or the so-called bad bank, was registered in Mumbai with a paid-up capital of ₹74.6 crore, according to filings with the Registrar of Companies (RoC).
Touted as a one-stop solution to India’s burgeoning bad loan menace, NARCL was set up on July 7 with an authorized capital of ₹100 crore and has been classified as a “Union government company”, the RoC filings showed.
The setting up of the bad bank is part of the government’s efforts to clean up India’s financial system, which is sitting on one of the biggest piles of bad assets in the world. Transferring soured loans to NARCL will allow banks to cut their losses and renew lending.
Now that the company has been set up, we have to seek an ARC licence from the Reserve Bank of India (RBI) and are preparing the documents for that. Depending on when the approvals come, NARCL will shortly start operations,” said a person aware of the development, seeking anonymity.
Initially, state-run banks will transfer 22 bad loan accounts worth ₹89,000 crore to NARCL. Total bad loans worth ₹2 lakh crore are likely to be transferred in tranches.