The Government of India on September 15, 2021 approved a Rs 30,600-crore backstop facility for guaranteeing securities to be issued by the “National Asset Reconstruction Company Limited” (NARCL) also called as the “bad bank”.
- The bad bank is being set up to help aggregate and consolidate lenders’ non-performing assets (NPAs) or bad loans.
- Under the bad bank system, two institutions have been conceptualized; The “National Asset Reconstruction Company Limited” (NARCL) and India Debt Resolution Company Ltd (IDRCL).
- The NARCL will acquire assets by making an offer to the lead bank of a group of lenders of an NPA.
- The NARCL would make a 15 per cent cash payment to the banks based on a valuation and the rest would be given as security receipts. These receipts, in turn, would be guaranteed by the government’s Rs 30,600-crore backstop facility.
- To assist the NARCL, public and private banks together would set up an India Debt Resolution Company Ltd. (IDRCL) that would manage the acquired assets and try to improve their value for final resolution.
- 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 and 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.
(Source: TH and IE)
