Decoding the National Asset Reconstruction Company Ltd

The National Asset Reconstruction Company Ltd, or NARCL, is an asset reconstruction company that has been tasked with taking over and managing the stressed assets of commercial banks.

• Commercial banks have identified stressed assets worth Rs 2 lakh crore to be managed by the NARCL in its first phase.
• The NARCL will commence its operations with a total capital of Rs 6,000 crore.
• In October 2021, the Reserve Bank of India (RBI) issued a license to the NARCL, enabling it to operate as a ‘bad bank’ .
• Public Sector Banks (PSBs) own 51% of the NARCL.
• Banks will consolidate their stressed assets with the NARCL for resolution.
• The Managing Director of the NARCL is PM Nair, who is a stressed assets expert from the State Bank of India (SBI).

The Role of NARCL and IDRCL

The NARCL will acquire fully provisioned stressed assets by making an offer to the lead bank in a consortium of lenders. Upon acceptance of the offer, the NARCL will engage with the India Debt Resolution Company Ltd. (IDRCL) for the management and resolution of the stressed assets.

• IDRCL is an operational entity/service company that will manage the assets and employ professionals and turnaround experts in the process.
  • Public Sector Banks (PSBs) and public Financial Institutions (FIs) will hold a maximum of 49% stake in IDRCL, while the remaining 51% will be held by private lenders.
• The stressed assets acquired by NARCL will be managed by IDRCL for price discovery and value addition.

Why is NARCL Needed?

While there are other asset reconstruction companies (ARCs) for the resolution of stressed assets, the NARCL is significant because the existing ARCs have proven to be effective only for smaller value loans. Despite other asset resolution mechanisms, including the Insolvency and Bankruptcy Code (IBC) , the Union Budget 2020-21 announced the NARCL-IDRCL structure considering the large stock of legacy non-performing assets ( NPAs ).

How Does NARCL Acquire Bad Loans?

NARCL will take over identified bad loans of the lenders. In the first phase, NARCL will acquire stressed assets worth about Rs 2 lakh crore. The stressed assets will be acquired through a 15 percent upfront cash payment and 85 percent in the form of security receipts. In September 2016, the union cabinet cleared the proposal to provide a government guarantee worth Rs 30,600 crore to security receipts issued by NARCL.

The government guarantee represents the difference between the assets’ face value and the value realised out of the sale or liquidation. The guarantee is for five years. The guarantee is needed as it imparts credibility and provides for contingency buffers.

Under the process, the lead bank will go for the Swiss Challenge form of public procurement in which other ARCs will be invited to make offers to find the higher valuation of the stressed assets on sale.

How Do Banks Benefit from NARCL?

• Incentivizes quicker action on resolving stressed assets
• Helps in better value realization
• Allows bank personnel to focus on increasing business and credit growth
• Improves the valuation of banks
• Enhances the ability of banks to raise market capital

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