Bank security

Security receipts from the wrong bank to get government backing

The long-awaited ‘bad bank’ – National Asset Reconstruction Company Ltd – has moved closer to commissioning with the Union Cabinet approving a crucial proposal that requires the government to guarantee security receipts (SRs) issued by the Union. NARCL, when purchasing NPA from banks.

For starters, the government could allocate 31,000 crore yen in guarantees, sources said. This is a contingent liability for now and is unlikely to have an impact on the tax department in the short term, they added.

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The Cabinet move comes on the heels of the incorporation of NARCL in Mumbai last month and the Indian Banks Association (IBA) asking the Reserve Bank of India for a license to create a bad bank of 6,000 crore.

NARCL – sponsored primarily by Canara Bank (which will likely take a 12 percent stake) and have an equity stake in other nationalized banks – will buy bad loans from banks and issue SRs up to 85 percent and cash for the remainder, in accordance with standard industry practice.

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Already, PSB have identified 22 stressed assets (consortium loans over 500 crore) totaling ₹ 82,500 crore which will be phased in to the bad bank. In the long term, stressed assets worth up to ₹ 2 lakh crore are expected to be transferred to NARCL.

What is a bad bank?

A bad bank is essentially an entity that houses bad debts (non-performing assets) of banks and resolves or liquidates them to collect as much money as possible.

One of the great advantages of having a NARCL will be that it will avoid delays in making a decision on collections, as most loans so far have involved the consortium approach and required the approval of several lenders. before recovery can take place, said a former CEO of a PSB.

Budget proposal

Finance Minister Nirmala Sitharaman proposed in this year’s budget the creation of an ARC as well as an asset management company (to be called India Debt Management Company) to take over stressed bank debt. The AMC will be controlled by the private sector and will help turn around struggling assets for a possible recovery. However, she had not indicated that the government would guarantee the SR issued by NARCL.

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