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Union Cabinet approves bad bank blue print, approves 30,600 Cr guarantee

17/09/2021 at 12:45 PM

New Delhi, Sept 17: The Union Cabinet has approved the plan for setting up the National Asset Reconstruction Company Limited (NARCL) also known as the ‘bad bank’.

It is aimed at reducing non-performing assets (NPA) of public sector banks.

“The Union Cabinet yesterday approved Central Government guarantee up to Rs 30,600 crores to back Security Receipts to be issued by National Asset Reconstruction Company Limited,” said Finance Minister Nirmala Sitharaman in a press conference.

The plan to set up the ‘bad bank’ was announced during the Union Budget 2021.

Sitharaman said an asset quality review of banks was conducted in 2015, and it revealed a high incidence of non-performing assets (NPAs).

The government then came up with a ‘4R’ strategy of Recognition, Resolution, Recapitalisation and Reforms.

“After recognition, quantification of NPAs started in a planned manner, recovery also started. In the last 6 financial years, the ‘4Rs’ were executed meticulously, banks have recovered Rs. 5,01,479 crore,” the finance minister said.

Sitharaman also said that only two of the 21 public sector banks were profitable in 2018 and in 2021 only two have reported losses for the full year.

Elaborating on how the NARCL will function, Nirmala Sitharaman said, “NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.”

She went on to say that the guarantees can only be involved by banks on resolution or liquidation of said assets. The guarantees will be valid for 5 years.

“Government guarantees will be valid for up to five years. This will ensure a timely resolution of assets,” Nirmala Sitharaman said.

It may be noted that the NARCL will take up bad loans from lenders worth Rs 2 lakh crore, of which Rs 90,000 crore will be transferred in the first phase.

Along with the NARCL, the government will also set up an Indian Debt Resolution Company, said the finance minister. It may be noted that public sector banks will hold a 51 per cent stake in NARCL and a 49 per cent stake in Debt Management Company.

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