Bad Bank Setup And Guarantee Programme
- The government has set up two new entities to acquire stressed assets from banks and then sell them in the market.
- The “National Asset Reconstruction Company Limited” (NARCL) has already been incorporated under the Companies Act. It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
- India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market. The NARCL-IDRCL structure is the new bad bank. To make it work, the government has okayed the use of Rs 30,600 crore to be used as a guarantee.
- It will be a five-year guarantee for the National Asset Reconstruction Company Limited (NARCL)-issued security receipts to banks. Under the mechanism, the NARCL will acquire assets by making an offer to the lead bank.Private sector asset reconstruction firms(ARCs) may also be allowed to outbid the NARCL.
How it works?
- A 15% cash payment would be made to the banks based on some valuation and the rest will be given as security receipts.
- Once the NARCL and the IDRC have finally resolved the asset, the balance 85% held as security receipts would be given to the banks.
- 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 : Indian Express