The Union Cabinet has approved government guarantee of Rs. 30,600 crore for Security Receipts issued by National Asset Reconstruction Company (NARCL) as part of bad debt resolution will be valid for five years.
The Government of India incorporated two companies namely National Asset Reconstruction Company Ltd. (NARCL) and India Debt Resolution Company Ltd. (IDRCL)
National Asset Reconstruction Company Ltd.(NARCL)
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Commonly known as Bad Bank
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51% of the stake will be owned by Banks and Non-Banking Financial Companies (NBFCs)
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NARCL can also raise debt as required
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NARCL will purchase bad loans from banks under 15:85 structure
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15% of the Net Asset Value (NAV) in cash and issue Security Receipts (SRs) for the rest of 85%
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The SRs can be invoked to cover the shortfall between the amount realised from the asset and the face value of SRs issued for that asset, subject to a total ceiling of Rs. 30,600 crore and a 5-year validity period
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The SRs are tradable in market
India Debt Resolution Company Ltd.(IDRCL)
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A maximum of 49 percent of the stock will be held by public sector banks and public financial institutions (PSBs and PFIs), with the rest held by private sector lenders.
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IDRCL is a service company/operational entity
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will oversee the asset and enlist the help of market experts and turnaround specialists.
PROCESS:
- 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.
- NARCL Pay 15% of NAV in cash and Balance 85% in Government Guaranteed Security Receipts.
BENEFITS TO BANKS:
- The government guarantee will be valid for five years.
- Invocation of guarantee will be resolution or liquidation.
- In the event of a delay in settlement, NARCL is required to pay a guarantee fee, which increases over time.
- It will incentivize quicker action on resolving stressed assets thereby helping in better value realization.
- Increasing business and credit growth.
- As the holders of these stressed assets and SRs, banks will receive the gains.
- It will increase the bank’s ability to raise market capital and improve the bank’s valuation.
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