The Reserve Bank of India’s (RBI’s) approval for the implementation of the proposal for setting up a ‘Bad Bank’ is still pending.
- In September 2021, the Union Cabinet approved the Rs. 30,600 crore guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.
NARCL & IDRCL:
- The NARCL has been set up and issued a license by the RBI to conduct business as an Asset Reconstruction Company (ARC).
- NARCL will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
- Public Sector Banks (PSBs) will maintain 51% ownership in NARCL.
- Simultaneously, a separate company has been set up to function as an Asset Management Company, named India Debt Resolution Company Limited (IDRCL), which will provide management and resolution of assets and also help in the operational aspects, relating to price discovery and aim at evolving the best possible recovery and the resolution process.
- PSBs and Public Financial Institutes (FIs) will hold a maximum of 49% stake in IDRCL. The remaining 51% stake will be with private-sector lenders.
- The NARCL is majorly owned by public sector banks with 51% ownership but in the case of the IDRCL, 51% shares are in private hands.
- The NARCL will first purchase bad loans from banks.
- It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
- When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
- If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
- The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.
- This guarantee is extended for a period of five years.
- The bad bank is an ARC or an Asset Management Company (AMC) that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
- The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
- The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.