The Union Cabinet on Monday approved Rs 30,600 crore government guarantee for the National Asset Reconstruction Company (NARCL), thereby paving the way for operationalisation of bad bank. One of the key ideas behind formation of bad banks is to de-stress the balance sheets of the banks.
- A bad bank is a corporate structure that isolates risky assets held by banks in a separate entity.
- It is established to buy non-performing assets (NPAs) from a bank at a price that is determined by the bad bank itself.
- 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.
- The value of bad loans being carved out of bank books for transfer to the NARCL is around Rs 2 lakh crore.
- About Rs 90,000 crore in bad loans will be transferred in the first phase. The guarantee of Rs 30,600 crore will cover the entire pool of Rs 2 lakh crore.