Finance Minister Announces Details For Bad Bank, Govt To Back With Guarantee

Finance Minister today spelled out details of the bad bank, in which the government would guarantee Rs 30,600 crore in guarantees to National Asset Reconstruction Company Ltd to buy bad loans from banks. The NARCL will purchase bad loans from banks, where it will offer 15% of the net asset value in cash and issue security receipts for the rest.

Substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution," said Ministry of Finance on the rationale for setting up the bad bank.

Briefing reporters on the decision, she said banks have recovered Rs 5.01 lakh crore of unpaid loans in the last six years. Of this, Rs 3.1 lakh crore has been recovered since March 2018.

"The announcement today of the 5 year sovereign guarantee to the NARCL or bad bank, caps of the planned direction that the Government had envisioned to address the NPA stress. The move, while expected from the promise of the 2021 budget, has come off the back of some of the PSUs showing strength in capital market raising recently. The sovereign guarantee will support the regulatory provisioning requirement of the RBI and allow the banks to free up that capital without the burden of additional provisioning - effectively allowing more participation from the banks to resolve their NPAs through the bad bank. This is a positive move for the banking sector and the Government has ensured that the majority of the PSUs are capable of standing on their own feet before announcing this. The success of the bad bank however will depend on the implementation and management of the transferred NPAs and it is likely that the Government will keep a close eye on the management of the India Debt Resolution Company that will be tasked with the same," Anish Mashruwala, Partner, J Sagar Associates said.