FM Sitharaman Announces Rs 30,600 Cr Govt Guarantee For 'Bad Bank' - All You Need To Know

The guarantees will be in the form of a contingent liability that will not result in a financial outflow from the government's coffers.

New Delhi: The government on Wednesday approved a guarantee of Rs.30,600 crore to support Security Receipts issued by the bad bank - National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.

NARCL wants to buy stressed assets worth around Rs. 2 lakh crore in stages within RBI's current standards. It plans to buy them for 15% cash and 85% in Security Receipts (SRs).

The guarantees will be in the form of a contingent liability that will not result in a financial outflow from the government's coffers.

The Union Budget announced the intent to establish an ARC-AMC to take over current debt, manage it, and sell it to buyers to recover the value of stressed assets.

“We have addressed issues in the banking sector that were staring us in the face in 2015,” Sitharaman said. Banks have recovered more than Rs 5 lakh crore in the last six financial years, of which Rs 3.1 lakh crore has been recovered since March 2018, she added.

Sitharaman also said that Rs 99,000 crore has been recovered from written-off assets such as Bhushan Steel and Essar Steel.

"The announcement for Rs 30600 crore guarantees to backstop the proposed Security receipt to be issued under The NACRL framework is a significant step that will facilitate the Banks to take speedy decisions and the security provided will positively maintain the strength of Bank balance sheets. In the absence of the guarantee, the banks would have been required to make higher provisions. It is going to create a win-win situation for all stakeholders," said Mr. Jyoti Prakash Gadia, Managing Director, Resurgent India. 

Sonam Chandwani, Managing Partner at KS Legal & Associates believes that transferring bad loans to the National Asset Reconstruction Company Ltd will undoubtedly put an end to the bad loan scourge.

"The Cabinet approval will pave the road for NARCL's operationalization. With banks still cash-strapped, the central bank's support would indeed rescue bad banks.  The implementation of a fee for bad asset management by the NARCL would not only incentivize efficient asset management but would also close the loop from the banks' perspective," she said.