Govt sets up NARCL, big boost for Banking Sector

Finance Minister Nirmala Sitharaman on September 16, 2021, announced the approval of the Union Cabinet for a government guarantee of Rs 30,600 crore for security receipts issued by the National Asset Reconstruction Company (NARCL).“NARCL will pay 15 per cent of the agreed value for the loan in cash and the remaining 85 per cent will be a government-guaranteed security receipt,” the finance minister announced.The Finance Minister added that the guarantee can be invoked only on resolution or liquidation of the said assets by the banks. The NARCL will take bad loans from lenders worth Rs 2 lakh crore, of which Rs 90,000 crore will be transferred in the first phase.What is National Asset Reconstruction Company Limited (NARCL)?NARCL is incorporated under the Companies Act and has applied to the Reserve Bank of India for the license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidates stressed assets for their subsequent resolution. Public Sector Banks (PSBs) will retain 51 per cent ownership in NARCL.What is India Debt Resolution Company Ltd. (IDRCL)?IDRCL is a service company/operational entity that will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and public FIs will have a maximum stake of 49 per cent and the rest will be with private-sector lenders.Why is NARCL-IDRCL type structure needed when there are existing ARCs?Existing ARCs have been instrumental in resolving stressed assets, especially for small value loans. Various available resolution mechanisms, including the Insolvency and Bankruptcy Code (IBC), have proved to be useful. However, considering the large stock of old NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.How will NARCL and IDRCL work?The NARCL will acquire the assets by making an offer to the lead bank. Once the proposal of NARCL is accepted, IDRCL will be engaged for management and value addition.Why is a Government Guarantee needed?Resolution mechanisms of this nature that deal with backlogs of NPAs usually require a backstop from the Government. It provides reliability and provides for contingency buffers. Therefore, the Government of India guarantees up to Rs 30,600 crore will support the Security Receipts (SR) 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 will cover the shortfall between the face value of the SR and the actual realization. The Government of India guarantee will also enhance the liquidity of the SRs as such SRs are tradable.What benefit do banks get from this new structure?This will encourage prompt action on the resolution of stressed assets which will help in better value realization. This approach will allow personnel in banks to increase business and focus on credit growth. As holders of these stressed assets and SRs, the banks will get the benefit. In addition, it will improve the valuation of the bank and enhance its ability to raise market capital.