Finance Minister Nirmala Sitharaman on Thursday announced the setting up of the National Asset Reconstruction Company Limited to acquire bad loans from banks in the country. She added that the government will provide Rs 30,600 in guarantee for the purpose.
Asset reconstruction companies typically buy bad loans from banks and sell or liquidate assets that have been offered as securities against them.
The setting up of the National Asset Reconstruction Company Limited, a proverbial “bad bank”, was proposed by Sitharaman in her Budget speech in February.
On Thursday, she said that the entity has been incorporated under the Companies Act and it has applied for a licence to the Reserve Bank of India. It will acquire stressed loans of about Rs 2 lakh crore in a phased manner from various banks.
Public sector banks will hold 51% ownership in the National Asset Reconstruction Company Limited, the finance minister added.
Besides this, Sitharaman also announced formation of the India Debt Resolution Company Limited. This body will facilitate the resolution of the stressed loans acquired by the “bad bank” by selling or liquidating assets linked to them.
Government-owned banks and financial institutions will hold 49% stake in this entity, while private banks will have the remaining ownership.
What the two entities will do
The finance minister said that the National Asset Reconstruction Company Limited will acquire bad loans from banks by making an offer to buy them.
The company will do a valuation of the assets that have been offered as securities against stressed loans and acquire them from banks under a 15:85 structure.
Under this arrangement, it will offer the banks 15% of the value of the assets in cash and issue security receipts for the rest. These security receipts will be backed by government guarantee, for which the provision of Rs 30,600 crore has been made.
The guarantee will be invoked in case there is a difference between the face value of assets offered to a bank initially and the amount received by its sale or liquidation.
Once the bank accepts the offer, the India Debt Resolution Company Limited will work on management of the bad loans and their resolution.
Sitharaman said that provisions for stressed loans worth Rs 2 lakh crore that will be transferred to the “bad bank” have already been made. The government guarantee will only act as a contingent liability and will not add to the country’s fiscal deficit immediately.
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