Nirmala Sitharaman announces Rs. 30,600 crore guarantee for 'bad bank'
To reduce the non-performing assets (NPA) of public sector banks, the Union Cabinet approved a plan to set up the National Asset Reconstruction Company Limited (NARCL) or the "bad bank." Union Finance Minister Nirmala Sitharaman said the Cabinet has approved a government guarantee of up to Rs. 30,600 crore for security receipts to be issued by the NARCL to public sector banks with NPAs.
'Asset quality review of banks found high incidence of NPAs'
Sitharaman announced Thursday, "The Union Cabinet yesterday approved Central Government guarantee up to Rs. 30,600 crores to back security receipts to be issued by National Asset Reconstruction Company Limited." The FM said that a 2015 asset quality review of banks found a high incidence of NPAs. Hence, the government has proposed a '4R' strategy—Recognition, Resolution, Recapitalisation, and Reforms.
'Banks have recovered Rs. 5 lakh crore in 6 years'
Sitharaman said, "After recognition, quantification of NPAs started in a planned manner, recovery also started. In the last six financial years, the '4Rs' were executed meticulously, banks have recovered Rs. 5,01,479 crore." Over Rs. 3 lakh of the Rs. 5,01,479 crore was recovered starting March 2018, indicating recovery nearly four years ago. Two of 21 public sector banks were profitable in 2018, she added.
What is a 'bad bank'?
A "bad bank" is a bank that takes bad loans from other lenders to clear their balance sheets. During Budget 2021, the government had revealed plans to establish an Asset Reconstruction Company along with an Asset Management Company. The aim was to consolidate and acquire the existing stressed debt from public sector banks, manage them, and sell them off to buyers for value realization.
How will the bad bank work?
Sitharaman said, "NARCL will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be government-guaranteed security receipts." The guarantees—valid for five years—can only be involved by banks on resolution/liquidation of assets. The NARCL will take bad loans worth Rs. 2 lakh crore from lenders and Rs. 90,000 crore will be transferred in the first phase.
