Bad bank to fix a fee to manage stressed assets

MUMBAI: The management of India’s bad bank is discussing the modalities of how much lenders would have to cough up as yearly fee in exchange for managing their toxic assets, a person aware of the development said.

“We are in the process of finalizing the management fee. The fee will depend on the quantum of guarantee the National Asset Reconstruction Co. Ltd (NARCL) gets from the government. Depending upon the value of the guarantee, a guarantee fee would have to be paid to the government,” said the person cited above.

Lenders sell stressed loans to asset reconstruction companies (ARCs) at a discount, either in exchange for cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers the specific loan. That apart, ARCs charge an asset management fee of 1.5-2% of the asset every year.

News agency PTI reported on 29 June that the Indian Banks’ Association (IBA), entrusted with the task of setting up the bad bank, has pegged the government guarantee at around ₹31,000 crore. The idea is that NARCL would buy bad loans at 15% cash and the remaining 85% would be in security receipts guaranteed by the government.

The person added that the company now has met the minimum capital criteria of ₹100 crore as per rules of the Reserve Bank of India (RBI).

According to an earlier equity subscription statement dated 4 August, NARCL had received ₹74.6 crore from a set of eight public sector banks—Canara Bank, State Bank of India (SBI), Union Bank of India, Bank of Baroda (BoB), Punjab National Bank (PNB), Bank of India (BoI), Bank of Maharashtra and Indian Bank.

“Since then, we have been able to add more capital from lenders. There are more banks, both public and private, which are in the process of obtaining internal approvals,” said the person.