National Asset Reconstruction Company to acquire stressed assets of about Rs 2 lakh crore in phases

New Delhi [India], September 16 (ANI): Union Cabinet approved the Central Government guarantee of Rs 30,600 crore to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets on Wednesday.
Union Ministry of Finance on Thursday said NARCL proposes to acquire stressed assets of about Rs 2 lakh crore in phases within extant regulations of RBI.
Answering frequently asked questions about new government strategy, the Ministry of Finance, in an official release, said NARCL intends to acquire these through 15 per cent Cash and 85 per cent in Security Receipts (SRs).
NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset Reconstruction Company (ARC). As per the Ministry, NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.
"Public sector Banks (PSBs) will maintain 51 per cent ownership in NARCL," the release said.
It further informed that PSBs and Public Financial Institutes (FIs) will also hold a maximum of 49 per cent stake in India Debt Resolution Company Ltd. (IDRCL), which is a service company/operational entity created to manage the asset and engage market professionals and turnaround experts. The rest 51 per cent stake in IDRCL will be with private-sector lenders.
Answering the query as to why NARCL-IDRCL type structure is needed when there are 28 existing ARCs, the Ministry said, "existing ARCs have been helpful in the resolution of stressed assets, especially for smaller value loans. Various available resolution mechanisms, including IBC, have proved to be useful. However, considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative."
The Ministry of Finance said the NARCL will acquire assets by making an offer to the lead bank, and once NARCL's offer is accepted, then, IDRCL will be engaged for management and value addition. It said that the government guarantee is needed because the resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from the government.
"This imparts credibility and provides for contingency buffers. Hence, the GoI guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI's guarantee will also enhance the liquidity of SRs as such SRs are tradable," the release said.
Explaining the benefits that banks will get from this new structure, the Finance Ministry said the new structure will incentivize quicker action on resolving stressed assets thereby helping in better value realization.
"This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank's valuation and enhance their ability to raise market capital," it stated.
To the question of why the new structure is being set up now, the Ministry informed that Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought a sharper focus on recovery.
"In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution," it added.
The release said that the government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to an overall ceiling of Rs 30,600 crore, valid for 5 years.
Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost, it added.
The government guarantee will be valid for five years and the condition precedent for invocation of the guarantee will be resolution or liquidation. Further, to disincentivize delay in resolution, NARCL has to pay a guarantee fee which increase with the passage of time.
The Ministry informed that the Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). It will also raise debt as required.The GoI guarantee will reduce upfront capitalization requirements.
NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II. (ANI)