Bad Bank

IAS coaching - Bad Bank

Bad Bank

 

Context:

  • The bad bank – National Asset Reconstruction Company Limited is ready to commence operations with 15 cases worth Rs.50,335 crore to be transferred by March 31.
  • A key proposal announced in this year’s (2021) Budget, a bad bank to deal with stressed assets in the loss-laden banking system, has received all regulatory approvals.

 

 

Structure of the bad bank:

  • NARCL will acquire and aggregate the identified NPA accounts from banks, while IDRCL, under an exclusive arrangement, will handle the debt resolution process.

 

NARCL:

 

  • The NARCL has been incorporated under the Companies Act and has applied to the the Reserve Bank of India for license as an Asset Reconstruction Company (ARC). 
  • NARCL is basically a bad bank created by the government in the mould of an asset reconstruction company.
 IDRCL

Along with NARCL, the government will also set up the India Debt Resolution Company Ltd (IDRCL).

  • The IDRCL is a service company or an operational entity, which will manage assets and loop in market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

 

How it works?

 

  • Under the new structure approved by the regulator, the bad bank—the National Asset Reconstruction Co. Ltd (NARCL)—will acquire and aggregate the bad loan accounts from banks, while India Debt Resolution Co. Ltd (IDRCL) will handle the resolution process under an exclusive arrangement.
  • Majority-owned by state-owned banks, the NARCL will be assisted by the India Debt Resolution Company Ltd (IDRCL), in turn majority-owned by private banks, in resolution process in the form of a Principal-Agent basis.
  • NARCL and IDRCL will have an exclusive arrangement that will be as per the scope defined in the ‘Debt Management Agreement’ to be executed between these two entities. This arrangement will be on a ‘Principal-Agent’ basis and final approvals and ownership for the resolution shall lie with NARCL as the Principal, Khara said.
  • While he argued that this is as per the structure “originally envisaged”, the Indian Banks Association (IBA) is learnt to have wanted a dual structure with the asset management company or AMC as a privately held entity, to be out of the purview of the regulatory entities.
  • That would have given it requisite flexibility to deal with the resolution process, as normally a single entity is accountable as owner and for recovery of the assets in the asset reconstruction business. But now, with the ‘Principal and Agent mechanism’ that has been put in place to address regulatory concerns, the final approvals will still be done by NARCL as the Principal.
  • So, even though IDRCL is majority-owned by private banks, the final authority will rest with NARCL, which is majority-owned by public sector banks. This has been done possibly to address regulatory concerns around the bad bank structure
  • NARCL will identify and acquire assets on a 15:85 cash and security receipt (SR) basis. These SRs will be issued in favour of the transferring lenders and will be secured by a government guarantee for its face value.
  • While public sector banks have taken a majority stake in NARCL, IDRCL will be majority-owned by private sector banks. “This unique public-private partnership is envisaged to get the best of the talent in terms of the ability to handle the large exposures and have the benefit of aggregation,” Khara said. Domain expertise, he added, “will come in handy to resolve stressed assets.”
  • Once the bad loans are transferred to NARCL, a trust will be set up for each loan account, and the debt resolution will be handled by IDRCL, which will not carry any balance sheet.

Source: THE HINDU.