Stopgap solution
THE WEEK|October 17, 2021
The bad bank will help banks clean their books, but it will not solve the problem of NPAs
NACHIKET KELKAR

MANY THINGS HAVE been tried by the government and the Reserve Bank to fix the problem of bad loans that have plagued India’s banking system for a long timefrom debt recovery tribunals to the scheme for sustainable structuring of stressed assets—but with little success. The Insolvency and Bankruptcy Code implemented five years ago was widely seen as a solution that would work. It had some initial successes. But after that recoveries fell sharply and cases started dragging on, putting some banks into an existential crisis.

Now the government has a solution for thata bad bank, which will take over a chunk of the non-performing assets from banks, thus reducing the stress on their balance sheets while also trying to get a better resolution for the assets.

Bad banks, or asset reconstruction companies (ARCs), are nothing new in India, but their impact has been limited as they were all in the private sector. The process of sale and transfer of bad loans to private ARCs has been very slow owing to valuation issues and the huge upfront capital required to buy large non-performing assets. The government bad bank, or the National Asset Reconstruction Company Ltd, is expected to address such problems. “The NARCL is expected to buy out ₹2 lakh crore of bad assets over time, which would be 45 per cent of what all ARCs have collectively acquired till March 2021. That’s sizable, not only in the context of banking sector NPAs but also for the ARC industry,” said Krishnan Sitaraman, senior director and deputy chief ratings officer at the ratings agency CRISIL.

In the first batch, bad loans worth ₹90,000 crore are expected to get transferred to the NARCL.

The NARCL and the India Debt Resolution Company (IDRCL) will play a critical role in the management and resolution of large corporate bad loans. The NARCL, in which state-owned banks will hold 51 per cent stake and private sector lenders the rest, will aggregate and consolidate stressed loans. It will pay up to 15 per cent of the net asset value upfront in cash and security receipts will be issued for the remaining. The government will provide ₹30,600 crore guarantee for these security receipts.

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