India's 'Bad Bank' Goes Live With A Smaller Pool Of Assets
Banks line up Rs 83,000 crore worth loans for transfer to the bad bank
India's 'bad bank' or the National Asset Reconstruction Co. has gone live, with final approvals in place and banks agreeing to transfer 28 non-performing accounts worth Rs 83,000 crore to it.
In the first phase, 15 accounts worth Rs 50,000 crore will be transferred to the NARCL before March 31, said Dinesh Khara, chairman, State Bank of India.
The NARCL will purchase these loans through a 15:85 structure, where it will pay 15% of the sale consideration in cash and issue security receipts for the remaining 85%. The security receipts will be guaranteed by the government, said Khara at a press briefing. The government has cleared a guarantee amount of over Rs 30,000 crore against these receipts.
The NARCL will have an exclusive arrangement with the India Debt Resolution Co., which will be tasked with resolving these accounts. While the IDRCL will have full operational freedom, it will function as an agent of the NARCL for resolution.
"This arrangement will comply with applicable regulatory guidelines at all times," Khara said.
The pool of Rs 83,000 crore is smaller than the previously identified pool of Rs 2 lakh crore worth bad loans for transfer to the NARCL. Khara explained that since the Rs 2 lakh crore worth assets were identified in 2021, some have already been resolved while negotiations for the rest are still on-going.
"We will take a decision on whether more assets will need to be transferred to the NARCL, or if they can be resolved by banks themselves by next year," said J Swaminathan, managing director for the stressed assets management group at SBI.
The launch of the NARCL has seen delays owing to a difference of opinion between banks and the Reserve Bank of India. While the banks had pitched for a completely independent IDRCL to resolve assets, the RBI did not approve such a structure.
In a letter in December, the RBI cited sections of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest or SARFAESI Act, stating that resolution of the stressed assets could not be carried out through completely independent entities, not licensed by the regulator.
A principal-agent relationship allows for the NARCL to have greater control on the resolution process, with IDRCL acting as an agent for the process.
The bad bank, or the NARCL, was one of the key budget announcements by Union Finance Minister Nirmala Sitharaman in Feb 2021. The announcement comes days before the budget announcement for financial year 2022-23.