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‘Bad bank’ setup and guarantee programme announced by Government to clear the NPA mess:

GS Paper 3

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Context:

The government has set up two new entities to acquire stressed assets from banks and then sell them in the market.

 

Mechanism envisioned:

The “National Asset Reconstruction Company Limited” (NARCL) has already been incorporated under the Companies Act.

  • It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.

Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

  • The NARCL-IDRCL structure is the new bad bank. To make it work, the government has okayed the use of Rs 30,600 crore to be used as a guarantee.

 

 

About the Programme:

It will be a five-year guarantee for the National Asset Reconstruction Company Limited (NARCL)-issued security receipts to banks.

  • Under the mechanism, the NARCL will acquire assets by making an offer to the lead bank.
  • Private sector asset reconstruction firms(ARCs) may also be allowed to outbid the NARCL.
  • Separately, public and private lenders would combine forces to set up an India Debt Resolution Company (IDRC) that would manage these assets and try to raise their value for final resolution.

 

How it works?

  • A 15% cash payment would be made to the banks based on some valuation and the rest will be given as security receipts.
  • Once the NARCL and the IDRC have finally resolved the asset, the balance 85% held as security receipts would be given to the banks.
  • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked and the difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

 

Significance:

While there are 28 ARCs in the private sector, she said there was a need for government-backed receipts for big ticket resolutions. The latest move will ensure that NPAs for which this whole set-up is being created, and the value that is locked in the assets is realised and comes back to the banks; they use it as a growth capital and the banking system becomes more robust.

 

Insta Curious:

Do you know about the twin balance sheet problem? Read here.

 

InstaLinks:

Prelims Link:

  1. What is an Asset Reconstruction Company?
  2. What is a bad bank?
  3. Who can set up a bad bank in India?
  4. What are stressed assets?
  5. What are non performing assets?

Mains Link:

Discuss the merits and demerits of setting up of bad banks.

Sources: the Hindu.