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Govt sets up “Bad Bank" for NPA resolution.

  • Integrity Education, Delhi
  • 20, Sep 2021
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  • The Union Cabinet approved a 30,600 crore rupees backstop facility for guaranteeing securities to be issued by the National Asset Reconstruction Company Ltd. (NARCL), the socalled ‘bad bank’ that is being set up to help aggregate and consolidate lenders’ nonperforming assets (NPAs) or bad loans.
  • A ‘bad bank’ is a financial entity set up to acquire NPAs from banks and resolve them. The bank, which sells the stressed assets to the bad bank, is now relieved of the burden of the bad loans and can focus instead on growing its business by advancing fresh loans to borrowers requiring credit.
  • The NARCL, which is being set up by lenders and will be 51% owned by public sector banks, proposes to take over the fully provisioned stressed assets of about 90,000 crore Rupees in the first phase.
  • NARCL would make a 15% cash payment to the banks based on a valuation and the rest would be given as security receipts.
  • The guarantee, which will be valid for five years, would be invoked either at the time of resolution or liquidation to cover the shortfall (if any) between the face value of the security receipts and the actual realisation
  • To assist the NARCL, public and private banks together would set up an India Debt Resolution Company Ltd. (IDRCL) that would manage the acquired assets and try to improve their value for final resolution.