India unveils ‘bad bank’ with Rs306b government guarantee
The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.
The Indian government on Thursday gave the final go-ahead for setting up the country’s first ever 'bad bank' to be known as the National Asset Reconstruction Company Limited (NARCL) aimed at reducing non-performing assets (NPA) of public sector banks.
Finance Minister Nirmala Sitharaman said the federal cabinet has approved a government guarantee of up to Rs306 billion for security receipts that will be issued by the NARCL to public sector banks with NPAs.
For security receipts to have their value intact, the government has to give backstop arrangements, hence the government guarantee cleared by the cabinet, the minister noted. The government guarantee can be invoked by NARCL for meeting the shortfall between the face value of the security receipt and the actual realisation upon resolution/liquidation.
The minister said that the Budget 2021 had announced the government’s intention to set up an Asset Reconstruction Company (ARC) along with Asset Management Company to consolidate and take over existing stressed debt and thereafter manage and dispose of them to buyers for value realisation.
Addressing the media, she said that banks’ asset quality review had happened in 2015, for cleaning up and fully provisioning bank balance sheets, this revealed very high incidence of NPAs, and added that the government came up with a four-R strategy of Recognition, Resolution, Recapitalisation and Reforms.
“After recognition, quantification of NPAs started in a planned manner, recovery also started. In the last six financial years, the '4Rs' were executed meticulously, and banks have recovered Rs5.015 trillion. Out of this, over Rs3.0 trillion was recovered starting March 2018, including a record Rs1.2 trillion in 2018-19 alone. This indicates that public sector banks gradually started recovering roughly four years ago. Only two of the 21 public sector banks were profitable in 2018 and in 2021 only two have reported losses for the full year, she said.
Out of the huge amount recovered by banks during the last six years, Rs999.96 billion comprises the amount recovered from written off assets, she said.
Highlighting the recent banking reforms introduced over the past few years, Sitharaman spoke of the managerial reforms, bringing of cooperative banks under the Reserve Bank of India (RBI), supervisory framework for primary co-op banks, Bank Board Bureau, ARCs, strengthening risk management practices and debarring of willful defaulters from capital markets.
On the reasons behind the high level of NPAs, the minister said that large frauds of Rs1.0 billion or more have an average lag time of 57 months for fraud detection.
Now PSBs are not only making profits, they are also raising money from the markets, she said, adding that a total of Rs586.97 billion has been raised by PSBs as debt and equity.
NARCL will aggregate the NPAs in banks’ balance sheets (for which full provisioning has been done) and manage and dispose of them professionally, this will thus clean up banks’ balance sheets, she explained.
“Along with NARCL, we are also setting up an India Debt Resolution Company Limited, PSBs will have 51 per cent ownership in NARCL, while PSBs and public financial institutions will have a maximum of 49 per cent stake,” the finance minister said, adding that 15 per cent cash payment to be made to banks for NPAs based on some valuation, 85 per cent to be given as security receipts.
“Through setting up of NARCL and various other steps taken in recent years, we have in totality addressed the issues facing the Indian banking sector, which was in 2015 staring at us with twin balance sheet problems, we now have a way of resolving the stressed assets,” she said.
Dhaval Jasani, founder and CEO at ZTI, said the “bad bank” would be taking over existing debt and related securities from these PSBs, manage those assets effectively and dispose off these assets to potential buyers, thereby monetising such assets. “Given that the banks do not have the requisite skills and expertise to deal with such stressed assets, NARCL as a corporation has been set up to overcome this weakness and manage / dispose of these stressed assets while staff members in banks will continue to deal with the core operations of the bank,” said Jasani.
“Going forward, the potential buyers or Alternate Investment Fund will not be talking to multiple lenders and instead deal with NARCL as one institution,” he said.
“This is yet another reform in the right direction and it would assist PSBs in maintaining a healthy balance sheet while monetising collaterals that have been locked for various reasons/causes delaying the process of recovery. More liquidity for the banks means more loans to borrowers and more interest and service income for the banks,” said Jasani.
Krishnan Ramachandran, CEO of Barjeel Geojit Financial Services, the move will enable nationalised banks to transfer their realizable non-performing assets, which have been 100 per cent written off in their books to the NARCL. The banks in turn will receive 15 per cent of the agreed price in cash and the balance 85 per cent by way of Security Receipts guaranteed by the government. “This move is bound to improve the liquidity of the banks in the near term for better-quality lending, improve their capital adequacy requirements and also enable them to raise additional capital. This will also enable a better valuation for these banks in the capital markets,” said Ramachandran.
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