Bad Bank security receipts to secure Center support 30,600 crore

The government will provide a 30,600 crore yen guarantee for security receipts () issued by the proposed bad bank, Finance Minister Nirmala Sitharaman said on Thursday, announcing cabinet approval of the plan.

The National Asset Reconstruction Co. Ltd (NARCL) is being established as a bad bank to take over non-performing assets, allowing banks to focus on their core business, lending. State-run financial institutions, led by Canara Bank, will own 51% of the capital of NARCL.

“The union cabinet on Wednesday approved a proposal to provide a government guarantee for security receipts issued by National Asset Reconstruction Co.,” Sitharaman told reporters.

NARCL will acquire stressed assets of approximately 2 lakh crore in phases starting with ₹ 90,000 crore in bad debt. It will pay up to 15% of the agreed value for non-performing assets (NPA) in cash to public sector banks, while the remaining 85% will be offered in the form of securities receipts (SRs).

Bidding to comfort lenders

These will be reimbursed for the amount realized after resolution of the bad debt.

The government intervened with a guarantee to reassure lenders. It will fill the gap between the value of the SRs and the amount realized during the resolution of the underlying NPA.

“SRs only receive financial support from the government to the extent that they cover the gap between their realized value and their face value and this will last for five years,” she said. The fees that NARCL will pay to the government for such guarantees will continue to rise, prompting the prompt disposition of assets. The guarantee fee will start at 0.25% and increase each year.

Financial Services Secretary Debashish Panda said there would be a contingent liability on the government due to the 30,600 crore guarantee, but no immediate budget requirements are envisaged at this time.

APM resolution

The finance minister observed that private sector asset reconstruction companies (ARCs) do not support the resolution of high-priced assets.

“They are reluctant to ask for this kind of number, so there is a need to give out government-backed SRs,” she said. The collateral helps to keep the face value intact and also gives credibility to the exercise so that the valuation will be better when it is done.

“In fact, when sold the gap may not be there or very small, so (the warranty) may not be invoked in all cases,” she said.

The Ministry of Finance said in a statement that the condition for invoking the guarantee will be resolution or liquidation.

“The GoI guarantee will also improve the liquidity of the SRs, as these SRs are tradable,” he said.

NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, India Debt Resolution Company Ltd. (IDRCL), created with NARCL, will be engaged for management and value addition. Public financial institutions will hold 49% of the capital of the IDRCL.

Best achievement

Sitharaman said this will allow bankers to engage in their basic lending skill, as they will not need to seek out the best bad debt buyer or negotiate with them, as this will now be done by those who have knowledge and experience in the field.