Union Finance Minister Nirmala Sitharaman has announced a Rs 30,600 crore government guarantee for the National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets, paving the way for operationalisation of the bad bank.
The decision to provide sovereign guarantee for security receipts (SRs) issued by NARCL was taken at a meeting of the Union Cabinet headed by Prime Minister Narendra Modi .
The finance minister in Budget 2021-22 announced setting up of a bad bank as part of resolution of bad loans worth about Rs 2 lakh crore.
The bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. The government guarantee would be invoked if there is loss against the threshold value.
“For the SRs to hold on and to have their value intact, there is a need for government to give the backstop arrangement and that”s why Rs 30,600 crore has been cleared by the cabinet yesterday,” she said.
This sovereign guarantee would be for a period of 5 years and NARCL would have to pay a fee for this.
“The SRs are getting the backstop through government funding only in as much as to pay the gap between the realised value (resolution/liquidation) and face value of SRs and this will hold good for five years,” Sitharaman said.
The fee for the guarantee would be initially 0.25 per cent, which would progressively increase to 0.5 per cent in case of delay in resolution of bad loans, Financial Services Secretary Debasish Panda said.
This would enable speedy disposal of stressed assets and clean up balance sheets of banks for further lending, he explained.
The finance minister said “the guarantee helps in keeping the face value intact and also gives credibility to the entire exercise so the valuation will be better when it”s realised, actually when it’s sold off.”
India Inc Hail Move
Finance Minister Nirmala Sitharaman”s announcement of Rs 30,600 crore-government guarantee for the National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets is a landmark development and will help unclog the capital locked in the form of bad assets, India Inc said on Thursday.
The decision to provide sovereign guarantee for security receipts issued by NARCL was taken at a meeting of the Union Cabinet headed by Prime Minister Narendra Modi on Wednesday.
Chandrajit Banerjee, Director General of CII, said that with this step, the initiative to clean up the books of the public sector banks which started with the asset quality review in 2015, has come a full circle.
“PSBs being saddled with high NPAs has been one of the key reasons behind their risk averseness towards lending, leading to poor credit growth. With the mechanism of bad bank expected to be functional soon, this major roadblock in the recovery of the credit cycle is removed,” Banerjee said.
The announcement also re-assures the industry and investors that the government will keep on pushing ahead with bold reforms, he added.
PHDCCI President Sanjay Aggarwal said the government”s approval to provide the guarantee is “highly appreciable” as it would result in faster resolution of non-performing assets in the country.
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