FM Nirmala Sitharaman lays out plan for bad bank: In a landmark decision to address the issues in the banking sector FM Nirmala Sitharaman announced that the Union Cabinet had approved a government guarantee of Rs. 30,600 crores for securities receipts issued by the National Asset Reconstruction Company (NARCL) today.

Earlier in her budget speech for 2021-2022, Finance Minister Nirmala Sitharaman had announced the creation of a Bad bank or in other words, an Asset Reconstruction Company (ARC) and an Asset Management Company(AMC) to aid the ailing banking sector.

These companies would take up the stressed debts from banks and manage and dispose of them off to prospective buyers for value realization.

Following up on her announcement the National Asset Reconstruction Company (NARCL) was incorporated under the Companies Act. NARCL was set up to consolidate all the stressed assets with the banks which will then be pushed for resolution. Public sector banks will maintain a 51% ownership in NARCL.

In addition to the NARCL, the India Debt Resolution Company (IDRCL) has also been created. The IDRCL will manage the assets with the help of professionals for a possible turnaround. Here Public sector banks and public financial institutions will hold a maximum stake of 49%. The remaining will be held by private players.

Generally, asset reconstruction companies or bad banks pay off 15% of the stressed assets in cash and balance 85% in security receipts. Security receipts represent rights or interests in financial assets.

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Accordingly in the Finance Ministers’ words “NARCL will pay up to 15 percent of the agreed value for the loans in cash and the remaining 85 percent would be government-guaranteed security receipts,” Aprajita Saxena, Research Analyst at Trustline securities.

Stated to Financial Express that,” These security receipts would be tradable in the secondary markets and would infuse much-needed liquidity in the banking system.

A total of Rs. 2 lakh crore worth of NPA’s will be sent to NARCL in phases. Currently, Rs. 90,000 crores will be transferred in the first phase. The government guarantee mentioned above will be valid for up to 5 years. This limit has been set to ensure the timely resolution of these assets.

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As of June, the NPA levels stood at 7.5% in the banking system. Over the last 6 years, banks have recovered 5,01,479 crore. Out of this Rs. ₹3.1 lakh crore came in the last 3 years alone.

Once the stressed assets are moved out and the bank’s balance sheet is cleaned they can then focus on lending activities. This will further boost the desperate need for credit in the economy.

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