Bad Bank: What Do We Know So Far?

Nirmala Sitharaman Press Conference Highlights: In Budget 2021, the Finance Minister suggested establishing an organisation to address banks' growing non-performing assets (NPAs).

Bad Bank: What is it?

Finance Minister Nirmala Sitharaman announced the creation of an organisation to deal with banks' stressed assets in Budget 2021. She had stated, "An asset reconstruction company and asset management company would be set up to consolidate and take over the existing stressed debt."

Bad Bank: What do we know so far?

Last year, the IBA proposed the establishment of a bad bank to expedite the settlement of non-performing assets. In this case, the government approved the idea and chose to use an asset reconstruction and asset management business model.

What will a Bad Bank do?

A bad bank is an asset reconstruction corporation (ARC) that buys commercial banks' poor debts and pays them off over time. She had stated that it would manage and sell the assets to alternative investment funds and other potential investors to maximize their value.

Why Govt Wants to Set up a Bad Bank?

According to Nirmala Sitharaman, the Union government stated in Budget 2021 its plan to establish an Asset Reconstruction Company (ARC) and an Asset Management Company to consolidate and take over existing stressed debt, then manage and sell them to purchasers for value realisation.

Does the RBI Support the idea of a Bad Bank?

Governor Das suggested that the RBI consider creating a bad bank to deal with problematic loans. During Rajan's time as Governor of the Reserve Bank of India, the concept gained traction. The Reserve Bank of India (RBI) then launched an asset quality review (AQR) of banks, which discovered that some banks had repressed or disguised problematic loans to present a healthy balance sheet. However, due to a lack of consensus on the institution's usefulness, the proposal stayed on paper.

FM Announces Outlay of Bad Bank

The NARCL will buy problematic loans from banks using a 15:85 framework, in which it will pay 15% of the net asset value in cash and the balance in security receipts. The Union government will guarantee a portion of these security revenues.

Know the Bad Bank Plan

The guarantee will be in effect for five years. In addition, an India Debt Resolution Company Ltd would be established. Banks from the public sector will own 51% of NARCL.

IBA to form a Bad Bank

The government had left the establishment of a bad bank to the Indian Banks' Association. According to rumours, the business has appointed P M Nair, a stressed assets expert from the State Bank of India (SBI), as the managing director. IBA Chief Executive Sunil Mehta, SBI Deputy Managing Director S S Nair, and Canara Bank's Chief General Manager Ajit Krishnan Nair are the other directors on the board.

Rs 31,000 Guarantee for Bad Bank Approved, FM Announces

According to the finance minister, the Cabinet authorised a Central Government guarantee of up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company Limited (NARCL) on September 15th.

What will NARCL do?

PSBs would hold 51% of the planned NARCL, with private-sector lenders owning the rest. Lenders' problematic loans will be taken up by NARCL. Other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding a higher valuation of a non-performing asset on sale in a 'Swiss Challenge,' in which the lead bank with an offer in the hand of NARCL will go for a 'Swiss Challenge,' in which other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding a higher valuation of a non-performing asset on sale.

NARCL Was Formed In July 2021

Following registration with the Registrar of Companies, NARCL was incorporated in Mumbai last month (RoC). According to reports, the company asked the RBI for a licence to conduct asset reconstruction business after raising an initial capital of Rs 100 crore and completing other legal requirements.

High Incidence of NPA: FM

In 2015, banks underwent an asset quality assessment to clean up and properly provision their balance sheets. According to the finance minister, this indicated a very high rate of non-performing assets.

India Debt Resolution Company

FM says, "We are also setting up an India Debt Resolution Company Ltd to manage the Non-Performing Assets (NPAs). In this company, public sector banks (PSBs) and state-owned financial institutions will own a 49 per cent stake."

Why there is a Need for Govt-Backed Security?

Banks will be paid 15% in cash for NPAs based on a value, while the remaining 85% will be issued as Security Receipts. Many assets are being rebuilt. Companies exist in the private sector, but they are hesitant to take on large-ticket asset settlements, which is why government-backed security receipts are required, according to the finance minister.