Cabinet approves Rs30,600-cr govt guarantee to back NARCL's security receipts

The union cabinet on Thursday approved a government guarantee of Rs30,600 crore to back security receipts issued by National Asset Reconstruction Company Limited (NARCL) or `Bad Bank’ for acquiring stressed loan assets of commercial banks.

NARCL proposes to acquire stressed assets of about Rs2 lakh crore in phases within extant regulations of the Reserve Bank of India (RBI). It intends to acquire these through 15 per cent cash and 85 per cent in security receipts (SRs). 
NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for licence to operate as an asset reconstruction company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. Public sector banks (PSBs) will maintain 51 per cent ownership in NARCL.
IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public sector banks and public sector financial institutions (FIs) will hold a maximum of 49 per cent stake and the rest will be with private sector lenders.
There are already 28 ARCs functioning in the country, but these have been helpful in resolution of stressed assets of only smaller value loans. Various available resolution mechanisms, including IBC have proved to be useful. However, considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is an initiative in this direction.
Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from government. This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs30,600 crore will back security receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable.
The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.
It will incentivise quicker action on resolving stressed assets thereby helping in better value realisation. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.
Insolvency and Bankruptcy Code (IBC), strengthening of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought sharper focus on recovery. In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.
Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to overall ceiling of Rs30,600 crore, valid for 5 years. Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost.
The GoI guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution or liquidation. Further, to disincentivise delay in resolution, NARCL has to pay a guarantee fee which increases with passage of time.
Capitalisation of NARCL would be through equity from banks and non-banking financial companies (NBFCs). it will also raise debt as required. The GoI guarantee will reduce upfront capitalisation requirements.
NARCL is intended to resolve stressed loan assets above Rs500 crore each amounting to about Rs2 lakh crore. In phase I, fully provisioned assets of about Rs90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.