New Delhi: The Union Cabinet has cleared a proposal to provide Rs 30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL) for a period of five years as part of resolution of bad loans, finance minister Nirmala Sitharaman said on Thursday.
The proposed bad bank or NARCL will aggregate bad loans or NPAs in banks’ balance sheets and manage as well as dispose them of professionally, the finance minister said. The NARCL will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be government-guaranteed security receipts.
According to news reports, NARCL proposes to acquire stressed assets of about Rs 2 lakh crore in phases. The first phase will transfer Rs 90,000 crore of bad loans to NARCL.
The government guarantee would be invoked if there is loss against the threshold value.
Briefing reporters on the decision, she said banks have recovered Rs 5.01 lakh crore of unpaid loans in the last six years. Of this, Rs 3.1 lakh crore has been recovered since March 2018.
Also read: It’s Budget Season. And That Means Talk of a ‘Bad Bank’ Yet Again.
What’s a bad bank?
A bad bank is established to separate the stressed assets held by a bank from its performing assets. Once the separation is done, the stressed assets go off the balance sheet of the bank. This helps the cleaning up of the bank balance sheet. At the same time, the bad bank takes over the servicing of the transferred stressed assets and their liquidation over a period of time.
Put simply, a bad bank buys stressed loans at a discount and sells them at a better price (or sometimes, even at a loss). For example, there’s a Rs 100 default loan, and the bad bank buys the loan at Rs 70. Then the bad bank offers this loan to other companies, which may want to buy it, at a better price. Basically, an asset worth Rs 100 is now bought at, say, Rs 75.
As bad loans in India’s banking system are expected to balloon amid a slowing economy, a proposal for the creation of a ‘bad bank’ was put forward by the Union government to better manage the ‘bad loans’ (non-performing assets) of public sector banks. (Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.)
According to economic commentator Vivek Kaul, the total bad loans written off between April 2013 and March 2021, a period of eight years, stands at a mind-boggling Rs 10.83 lakh crore.
The origin of a bad bank happened in the 1980s with the US and Sweden becoming its early adopters. Several governments have since then adopted this idea with mixed results.
(With inputs from PTI)
