Govt approves sovereign guarantee of Rs 30,600 crore for bad bank operations
The government has approved providing Rs 30,600 crore as state guarantee for security receipts issued by the bad bank, National Asset Reconstruction Company Limited (NARCL). The Union Cabinet on Wednesday approved the government guarantee mechanism, paving the way for the operation of the country’s first bad bank, in which public sector banks hold 51 per cent.
The government guarantee will allow banks to transfer their non-performing assets (NPAs) to NARCL, which will purchase 15 per cent of the amount in cash and the remaining 85 per cent of stressed assets on payment of security receipts.
The government guarantee will be available on the difference between the face value of the asset and the actual actual value to ensure that banks do not curtail the sale of stressed assets while helping to clean up their balance sheets.
The guarantee on the SR will be available for a period of five years to ensure that the bad properties are resolved in a time bound manner without any delay. If the asset resolution takes more than five years, the incentive of government guarantee will lapse.
The government has identified stressed assets worth Rs 2 lakh crore in the banking sector to be transferred to NARCL. However, in the first phase, it will take the fully rendered bad assets worth Rs 90,000 crore.
Giving details of the latest reform initiatives taken by the government to clean up the banking sector, Finance Minister Nirmala Sitharaman said that in the last six financial years, banks have already recovered Rs 5,01,479 crore. Out of this, Rs 3.1 lakh crore has been recovered since March 2018.
Sitharaman said the government guarantee will give more confidence to the lenders to sell their assets to NARCL.
Addressing a press conference on Thursday, the Finance Minister also said that apart from NARCL, the government is also setting up an India Debt Resolution Company Limited to manage NPAs. Public sector banks and government financial institutions will have 49 per cent stake in this company.
He said that private sector banks will also have a stake in it.
The Finance Minister in his 2021-22 Union Budget speech had announced the setting up of a ‘bad bank’ including an asset reconstruction company and an asset management company to handle the current stressed debt of banks.
A bad bank is a bank set up to buy bad loans and other liquid holdings of another financial institution.
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