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FINANCE MINISTER ANNOUNCES RS 30, 600 GOVERNMENT GUARANTEE FOR ‘BAD BANK’

FINANCE MINISTER ANNOUNCES RS 30, 600 GOVERNMENT GUARANTEE FOR ‘BAD BANK’

Context:

The Union Cabinet approved a Rs 30,600 crore government guarantee for the National Asset Reconstruction Company (NARCL), thus paving the way for the operationalisation of a bad bank. One of the key ideas for building bad banks is to de-stress the balance sheets of the banks.

Bad Bank:

  • A bad bank is a company building that separates dangerous assets held by banks in a separate entity.
  • It has been established to purchase non-bank assets (NPAs) at the bank at a price determined by the bad bank itself.
  • The bad bank or NARCL will pay up to 15% of the cash loan amount and the remaining 85% will be government-guaranteed receipts.
  • A government guarantee will be issued if there is a loss against the threshold value.
  • The number of bad loans recorded in bank accounts to be transferred to NARCL is around Rs 2 lakh crore.
  • About Rs 90,000 of bad loans will be transferred in the first phase. The guarantee of Rs 30,600 crore will cover the entire pool of Rs 2 lakh crore.

NARCL:

  • It is 51% owned by public sector banks.
  • It will have an operational entity, India Debt Resolution Company Ltd, to manage these assets and find potential buyers for them.
  • Banks that transfer their stressed assets will get 15 per cent of the value in cash and 85 per cent as tradable security receipts.

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