The Finance Minister reports that Guarantees up to Rs 30,600 crore for Security receipts to be issued by NARCL have been approved by the cabinet
A government guarantee of up to Rs 30,600 crore for security receipts to be issued by National Asset Reconstruction Company Ltd (NARCL) has been approved by the union cabinet. Security receipts represent an undivided right or interest in a financial asset. Usually, bad banks or asset reconstruction companies pay 15 per cent cash and 85 per cent in security receipts for buying distressed assets.
Since march 2018, Rs 3.1 Lakh crore have been recovered, out of the Rs 5,01,497 crore recovered by the banks in the previous six years. The government guarantee will give more confidence to lenders to sell their assets to NARCL.
Addressing a press conference, the FM reportedly said, “We are also setting up an India Debt Resolution Company Ltd to manage the Non-Performing Assets (NPAs). In this company, Public Sector Banks (PSBs) and state-owned financial institutions will own 49 per cent stake. A 15 percent cash payment will be made to banks for their toxic assets, 85 per cent will be security receipts. There will be a backstop guarantee for the banks”. She added that private sector banks also want to have a stake. Sitharaman added that the security receipts provide backstop funding, which will be good but only for five years.
The government is guaranteeing effective offers to pay the difference between the face value and realized value of the security receipts issued by NARCL. The gains would be accrued to the banks if the realised value is higher than the face value.
“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 problem, we now have a way of resolving the stressed assets,” The FM reportedly said.
The five-year limit will encourage banks to not drag the process with respect to NARCL has already been incorporated as a company. Rs 90,000 crore worth of NPAs will be transferred to the NARCL in the first place added Financial Services Secretary Debashish Panda.
In her 2021-22 union budget speech, the finance minister had announced the setting up of ‘bad-banks’. The asset reconstruction company and asset management company would be set up to consolidate and take over the existing stressed debt.
A bad bank is set up to buy the illiquid holdings and the bad loans of another financial institution. The government is planning to take on non-performing assets from their books through the planning of bad banks. The banks would buy bad loans at 15 per cent cash and rest as security deposits.
NBFCs in India have been accounting for NPA loans where repayment and installment have not been made for 90 days since the due date for several years now but the problem is spreading as more people are unable to pay the installments due to covid and its effect on small and medium businesses and also the loss of jobs.
A recent Assocham-Crisil joint study found that the bank GNPAs are likely to grow more than Rs 10 Lakh by march 2022. According to S&P Global Ratings, stressed assets of Indian banks will remain elevated at 11-12 per cent in fiscal 2022.
The agency expects that the non-performing loans plus restructured assets to increase to 11.5 per cent in the current fiscal from the previous 8.7 per cent. It also expects the banks’ performance to be affected in the first half because of the second wave of the pandemic.