Govt. guarantee mechanism of Rs 30,600 Cr gets approved by Union Cabinet to operationalise bad banks

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New Delhi: The government has approved providing Rs 30,600 crore as a state guarantee for the security receipts issued by the bad bank which is a bank set up to buy the bad loans and other illiquid holdings of another financial institution, National Asset Reconstruction Company Ltd (NARCL).

The government guarantee mechanism was approved by the Union cabinet on Wednesday, paving the way to operationalise the country’s first bad bank in which the majority 51 percent stake is held by public sector banks.

The government guarantee will allow banks to transfer their non-performing assets (NPAs) to NARCL, which will buy the stressed assets on payment of 15 percent of the amount in cash and the balance 85 percent in security receipts. Also, it will be available on the gap between the face value and actual realized value of the assets to ensure that banks do not lose out on stressed asset sales while also helping to clean up their balance sheet.

The guarantee on SRs will be available for a period of five years to ensure that the resolution of bad assets happens in a time-bound manner without any delay. The incentive of government guarantee would cease if asset resolution takes more than five years.

The government has identified Rs 2 lakh crore of stressed assets in the banking sector to be transferred to the NARCL. However, in the first phase, it would take up fully-provided bad assets worth Rs 90,000 crore.

Giving details of the latest reform initiative taken by the government to clean up the banking sector, Finance Minister Nirmala Sitharaman said that in the last six financial years, banks have already recovered Rs 5,01,479 crore. Of this, Rs 3.1 lakh crore has been recovered since March 2018.

Sitharaman added that the government guarantee will give more confidence to the lender to sell their assets to NARCI.

Addressing a press conference on Thursday, the Finance Minister also said that apart from NARCL, the government is also setting up an India Debt Resolution Company Ltd to manage NPAs. In this company, PSBs and state-owned financial institutions will own a 49 percent stake.

She added that private sector banks will also hold a stake in it.

The finance minister in her 2021-22 Union Budget speech had announced the setting up of a ‘bad bank’, including an asset reconstruction company and asset management company to take over the existing stressed debt of banks.