National Asset Reconstruction Company: First set of NPA transfer to bad bank likely by January

Last month, the Cabinet approved a proposal to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL, which is estimated to cost the exchequer Rs 30,600 crore over five years. In the first phase, fully-provisioned toxic assets will be transferred.

The National Asset Reconstruction Company (NARCL), or the so-called bad bank, is expected to witness the transfer of the first batch of toxic assets worth about Rs 90,000 crore by January 2022, banking sources told FE.

Earlier this month, the NARCL got a licence from the central bank to start operations. “It’s (NARCL) in the process of forming its board. Large stressed assets have already been identified, so their transfer is unlikely to be delayed beyond late December or early January,” a top banker familiar with the development told FE. The asset transfer will be a decisive step towards the resolution of large stressed assets worth Rs 2 lakh crore in the banking system.

Last month, the Cabinet approved a proposal to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL, which is estimated to cost the exchequer Rs 30,600 crore over five years. In the first phase, fully-provisioned toxic assets will be transferred.

The Indian Banks’ Association (IBA), which is spearheading the initiative to set up the bad bank, has put in place a preliminary board for the NARCL. Padmakumar M Nair, a chief general manager in the stressed assets resolution group of State Bank of India, has been appointed the managing director of NARCL. IBA chief executive Sunil Mehta, SBI deputy managing director SS Nair and Canara Bank chief general manager Ajit Krishnan Nair have also been inducted to the NARCL board so far. More directors are expected to be appointed soon.

The plan to set up NARCL comes at an opportune time. Gross NPA ratio of banks may surge to 9.8% by March 2022, under a baseline scenario, from 7.48% in March 2021, driven partly by the Covid crisis, according to the Reserve Bank of India’s Financial Stability report in July.

Although the Centre is giving guarantee on the SRs, it has not contributed to the equity of the Rs 6,000-crore NARCL. In fact, public-sector banks (PSBs) will hold 51% in it and private players will own the rest. Similarly, the PSBs and public financial institutions will have a 49% stake in the India Debt Resolution Company (IDRCL), which is being set up as an asset management company to work out the non-performing assets (NPAs) under the overarching NARCL structure, and the rest will be held by private lenders.

The NARCL will acquire the assets at net book value by offering 15% of it upfront (in cash), and the rest (85%) in SRs. Once the bad loan is resolved, realisation for the relevant bank would be in sync with its SR interest in that asset.

Typically, the NARCL will acquire assets by making an offer to the lead bank. Once its offer is accepted, the IDRCL will then manage the bad loans, add value to them and finally sell them off.