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Bad bank ready, 15 cases adding up to Rs 50,000 crore to be shifted by March 31

🔴 Government banks will hold majority in ARC; private banks will own 51% or more in debt resolution company

By: ENS Economic Bureau | Mumbai |
Updated: January 29, 2022 7:26:25 am
Economic Survey 2022-23, economic survery, Budget 2022, Union Budget, Nirmala Sitharaman, India GDP, Business news, indian expressFinance Minister Nirmala Sitharaman. PTI/File

WITH JUST three days for Union Budget 2022-23, a proposal by Finance Minister Nirmala Sitharaman February 1 last year to set up a ‘bad bank’ has been cleared.

State Bank of India Chairman Dinesh Khara Friday said the proposed ‘bad bank’ has “now” received all necessary permissions including from the Reserve Bank of India. It is ready to commence operations with 15 cases worth Rs 50,335 crore to be transferred by March 31, he said.

Khara said public sector banks will have a majority stake in the National Asset Reconstruction Company Limited (NARCL) while private banks will majorly own the India Debt Resolution Company Limited (IDRCL).

Sitharaman had in her February 1, 2021, Budget speech proposed a new structure for resolution of stressed assets. “The high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books. An Asset Reconstruction Company and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realisation,” she had said.

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SBI’s Khara said there were certain concerns being raised but eventually both NARCL and IDRCL have requisite approval. NARCL will acquire and aggregate identified non-performing asset (NPA) accounts from banks while IDRCL will handle the debt resolution process, he said.

To a query on why there was back and forth on the bad bank structure with the RBI, Khara said: “I think there is no difference in original construct and what has finally come into existence. This is a structure which has been envisaged for the first time, and whatever time has been taken, it is essentially to iron out some of the issues which could have possibly come up in future. So, they have all been ironed out and they have been appropriately addressed. And so, that the functioning of both entities should be smooth, and they should be in a position to achieve the objective for which they’re brought into existence.”

Concerns mainly arose on the dual ownership structure and operational mechanism with the setting up of two separate entities NARCL and IDRCL.

NARCL will acquire and aggregate the identified NPA accounts from Banks while IDRCL under an exclusive arrangement will handle the debt resolution process. This exclusive arrangement will be as per the scope defined in the ‘Debt Management Agreement’ to be executed between the two entities, Khara said.


Freeing up bank capital

Proposed in the first term of the NDA government, the bad bank has finally been approved. The new structure is expected to free up the balance sheet and help banks in lending to productive sectors.

“This arrangement will be on a ‘Principal-Agent’ basis and final approvals and ownership for the resolution shall lie with NARCL as the Principal. This is as per the structure originally envisaged,” he said.

Normally, a single entity to be accountable as owner and for recovery of the assets is in practice. The Indian Banks Association (IBA) is learnt to have wanted to have the dual structure with AMC as a privately held entity, to be out of the purview of the regulatory entities. But now ‘Principal and Agent mechanism’ has been put in place to address regulatory concerns, wherein final approvals will be done by NARCL as the Principal.

The asset resolution will be done in a phased manner. While a total of 38 accounts aggregating Rs 82,845 crore have been identified for transfer to NARCL, it will be done in a phased manner. In the first phase, at least 15 accounts worth Rs 50,335 crore will be transferred to the proposed bad bank by March 31.

Initially, an estimated Rs 2 lakh crore worth of bad assets was planned to be transferred to the ‘bad bank’. However, Khara said some of these accounts have already been resolved.

J Swaminathan, Managing Director, for the stressed assets management group at SBI said, “We will take a decision on whether more assets will need to be transferred to the NARCL, or if they can be resolved by banks themselves by next year.”

On the operational structure, Khara said the NARCL will purchase these bad loans through a 15:85 structure, where it will pay 15 per cent of the sale consideration in cash and issue security receipts (SRs) for the remaining 85 per cent. The SRs will be guaranteed by the government, Khara said.

“This unique public-private partnership will bring the benefit of aggregation, expertise to resolve stressed assets. I expect faster asset resolution to take place in the banking sector with the setting up of the bad bank,” he said.

In a press statement, SBI said IDRCL is expected to bring in superior resolution techniques, preserve the value, showcase brownfield assets and attract domestic as well as foreign investors, Alternate Investment Funds, etc. This will free up capital for further bank lending, it said.

Padmakumar Nair, a Chief General Manager from SBI’s Stressed Assets vertical will manage NARCL while Manish Makharia, Head of Alternate Investment Fund, SBI Funds Management Pvt Ltd will be heading IDRCL. Subrata Biswas, the nominee director on the Board of NARCL will be the interim Chairman and Diwakar Gupta continues as the Chairman of IDRCL.

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