Bad Bank marks completion of 6-year PSB cleanup exercise: FM

The 30,600 crore backstop that the Center is proposing to extend as collateral to security receipts to be issued by the National Asset Reconstruction Company Ltd (NARCL), or the so-called bad bank, will be valid for five years, a said Finance Minister Nirmala Sitharaman. said Thursday.

Informing reporters here about the outlines of the program, approved by Cabinet on Wednesday, Sitharaman said the government guarantee can be invoked to cover the shortfall between the amount realized from the underlying asset and the face value of the receipt. warranty issued for it. .

Finer details

NARCL, with a 30,600 crore backstop and the myriad of actions taken from 2015 onwards (starting with the banks’ asset quality review), completes the full cycle of cleaning up public sector banks by removing their postcode and carrying out collections through a specialized organization, she added.

On why the government should guarantee NARCL security receipts, Sitharaman said resolution mechanisms of this nature, which deal with an NPA backlog, generally require government support. This lends credibility and provides buffers for contingencies.

The government guarantee should also improve the liquidity of SRs, which is negotiable. Existing CRAs are not equipped to handle large legacy NPAs, and the fact that the government partners with public sector banks has an effect on the bottom line, she noted.

“The condition precedent for invoking the state guarantee will be resolution or liquidation. In addition, to discourage resolution delays, NARCL must pay warranty fees which increase over time. With this, we ensure rapid disposal of assets, ”Sitharaman said.

The minister said a 30,600 crore guarantee will be available for stressed assets of 2 lakh crore, of which up to 90,000 crore will be transferred from banks to NARCL during the first phase.

For this transfer, NARCL will pay banks 15% in cash and 85% in collateral receipts.

Resolution mechanism

Debashish Panda, secretary of the financial services department, said the guarantee will be a contingent liability for the government and as such there is no immediate impact on the IRS. He said 16 banks and NBFC are meeting for NARCL and public sector banks will hold 51% stake in it.

Sitharaman said India Debt Resolution Company Ltd has already been established and will operate as an asset management company. It will be a service company / operational entity that will manage the assets and employ market professionals and turnaround experts.

Public sector banks and public financial institutions will hold a maximum of 49 percent of the capital, with private lenders holding the remainder.

Sitharaman also said that the meticulous execution of the 4Rs strategy – Recognition, Resolution, Recapitalization and Reforms – since 2015 has served the banking system well.

In the last six years, banks have recovered 5.01 lakh crore with up to 3.1 lakh crore since March 2018. In 2018-2019, banks recovered a record 1.2 lakh crore, a she added.

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