GS Paper 3:
Topics Covered: Inclusive growth and issues arising from it.
A key proposal announced in this year’s (2021) Budget, a bad bank to deal with stressed assets in the loss-laden banking system, has received all regulatory approvals.
What is NARCL?
- Setting up of NARCL, the proposed bad bank for taking over stressed assets of lenders, was announced in the Budget for 2021-22.
- The plan is to create a bad bank to house bad loans of ₹500 crore and above, in a structure that will contain an asset reconstruction company (ARC) and an asset management company (AMC) to manage and recover dud assets.
- The new entity is being created in collaboration with both public and private sector banks.
- Majority-owned by state-owned banks, the NARCL will be assisted by the India Debt Resolution Company Ltd (IDRCL), in turn majority-owned by private banks, in resolution process in the form of a Principal-Agent basis.
How is NARCL different from existing ARCs? How can it operate differently?
- The proposed bad bank will have a public sector character since the idea is mooted by the government and majority ownership is likely to rest with state-owned banks.
- At present, ARCs typically seek a steep discount on loans. With the proposed bad bank being set up, the valuation issue is unlikely to come up since this is a government initiative.
- The government-backed ARC will have deep pockets to buy out big accounts and thus free up banks from carrying these accounts on their books.
What is an Asset Reconstruction Company (ARC)?
It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities.
- The asset reconstruction companies or ARCs are registered under the RBI.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.
Capital Needs for ARCs:
- As per amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores. The RBI raised this amount to Rs. 100 crores in 2017.
- The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets.
The total stress in the banking system would be in excess of Rs 15 lakh crore. The banks burdened with stressed assets and limited capital will find it difficult to manage the NPAs. There is also limited capital that the government can provide. This is where the bad bank model would step in and help both the government and banks.
The Supreme Court, in 2020, held that the cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’ and Parliament has legislative competence to provide for procedure for recovery of loan under the Sarfaesi Act. Read here.
- What are ARCs?
- What is SARFAESI Act?
- Sudarshan Sen committee is related to?
- About NARCL.
Discuss the roles and functions of ARCs.
Sources: the Hindu.