The National Asset Reconstruction Company Limited (NARCL) has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51 percent ownership in NARCL.
India Debt Resolution Company
IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49 percent stake and the rest will be with private sector lenders.
Need for NARCL-IDRCL type structure
Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans. Various available resolution mechanisms, including IBC have proved to be useful. However, considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.
Need for a government guarantee
Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from Government. This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for five years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable.
NARCL and IDRCL working
The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.
Benefit to banks
It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.
Government guarantee to be invoked
Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of rupees issued for that asset, subject to overall ceiling of Rs 30,600 crore, valid for 5 years. Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost.
GOI guarantee valid for 5 years only
The GoI guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution or liquidation. Further, to disincentivize delay in resolution, NARCL has to pay a Guarantee fee which increase with passage of time.
Capitalisation of NARCL
Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). it will also raise debt as required.The GoI guarantee will reduce upfront capitalization requirements.
Strategy for resolution of stressed assets
NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisionswould be transferred in phase II.
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