NARCL Operational in a Month to Pave Way for Bad Bank

The National Asset Reconstruction Company (NARCL) is likely to be operationalised in a month, paving the way for the transfer of stressed assets worth about Rs 83,000 crore in the first phase to the so-called bad bank for resolution.
BY Realty Plus
Published - Saturday, 10 Jul, 2021

The National Asset Reconstruction Company (NARCL) is likely to be operationalised in a month, paving the way for the transfer of stressed assets worth about Rs 83,000 crore in the first phase to the so-called bad bank for resolution. Formalities have been more or less completed. NARCL should take off in a month. Analysts have called for expeditious operationalisation of the bad bank so that it takes root before the next, Covid-induced surge in bad loans hits the banking system. NARCL is expected to see the transfer of large stressed assets (of at least Rs 500 crore each) worth Rs 2.25 lakh crore in phases. The IBA, which is spearheading the initiative to set up the bad bank, has already filed an application with the corporate affairs ministry for the incorporation of the NARCL. It has also finalised NARCL’s article of association as well as memorandum of association. Not just large lenders but all public-sector banks (PSBs), except for Punjab & Sind Bank, could pick up stakes in NARCL. The IBA has also held talks with REC, seeking its contribution to equity. The finance ministry could soon seek the Cabinet’s approval for a plan to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL while acquiring bad loans from lenders. This is estimated to cost the exchequer Rs 30,600 crore over five years. Government has backed the setting up of the NARCL, announced in the Budget for FY22, but it wouldn’t put in capital; instead, participating banks would contribute to the equity. However, it is set to give guarantee on the SRs to make the bad loan resolution process more viable and attractive. Expeditious resolution of bad loans is critical to stirring economic growth through sustained credit push. Global rating agency Fitch on 7th July cautioned that regulatory relief measures have postponed banks’ underlying asset-quality issues for now. In fact, the banking sector’s average impaired loans ratio dropped to 7.5% in FY21 from 8.5% a year before. But their medium-term performance will be dented without a meaningful economic recovery, it said. The agency expects impaired loans to peak after FY23 and state-run banks, with lower capital base than private peers’, are at greater risk.NARCL is expected to acquire stressed assets at net book value by offering 15% of it upfront (in cash), and the rest (85%) in SRs. Once the bad loan is resolved, realisation for the relevant bank would be in sync with its SR interest in that asset. While Canara Bank has announced it would be the sponsor of NARCL and hold a 12% equity, other large banks are expected to pick up just about 10% each. An asset management company comprising professionals will also be set up within the broader NARCL structure, which will work out the toxic assets and take appropriate decisions, including on selling them off to investors.