Good News On The Bad Front

Context: The NARCL-IDRCL bad bank will arm existing resolution mechanisms as one decision-making point.

New mechanism for tackling NPAs in banking sector

• 2021 budget announcement: For formation of a ‘bad bank’ under an ARC-asset management company (AMC) structure, comprising two entities – NARCL and IDRCL.
• National Asset Reconstruction Co Ltd (NARCL), incorporated on July 7, has a minimum 51% ownership by PSBs, and shall acquire stressed assets of Rs.2 lakh crore in phases within extant regulations of RBI.
  • It would acquire assets through a combination of cash (15%) from banks and non-banking financial companies (NBFCs) and security receipts (SRs, 85%) backed by GoI guarantee.
• India Debt Resolution Co Ltd (IDRCL), incorporated on September 3, will be majority-owned by private sector, and will be instrumental in formulating and implementing the resolution strategy for all assets held by various trusts under NARCL.

Intended benefits of the NARCL-IDRCL model

• Optimising resource utilisation: By selling stressed assets to NARCL, it leads to the release of management bandwidth and capital.
• Improving prospects for recovery: As the innovative public-private structure will ensure that the resolution of the stressed assets takes place in an efficient and focused.
• Support from GoI will provide similar backing to NARCL without actual fiscal outlay. This will enable it to resolve complex legacy NPAs, which have eluded resolution till now.
  • The security receipts arrangement will safeguard the face value of SRs and take away the need for 100% upfront capitalisation of NARCL.
  • GoI’s guarantee will also enhance liquidity of SRs, as SRs will be tradable. It will bring improvement in bank’s valuation and enhance their ability to raise market capital, which will, in turn, alleviate the need for fiscal support by GoI to banks.
• Assist in consolidation of debt: Currently debts are fragmented across various lenders, consolidation will lead to faster, single point decision-making, which is crucial for resolution.
  • It will incentivise quicker action on resolving stressed assets, thereby helping in better value realisation.
• IDRCL will engage market expertise for value enhancement: 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.