The Ministry of Finance on 16th September 2021 has clarified certain FAQs regarding Central Government guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited for acquiring of stressed loan assets
Answering frequently asked questions about new government strategy, the Ministry of Finance has stated that the NARCL proposes to acquire stressed assets of about Rs 2 lakh crore in phases within extant regulations of RBI. NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset Reconstruction Company (ARC). As per the Ministry, NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.
The Ministry of Finance clarified that the NARCL will acquire assets by making an offer to the lead bank, and once NARCL’s offer is accepted, then, IDRCL (Indian Debt Resolution Company Ltd) will be engaged for management and value addition. It said that the government guarantee is needed because the resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from the government.
Further to the question, why the new structure is being set up now, the Ministry clarified that Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought a sharper focus on recovery. In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.
Further the Government guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution or liquidation. Further, to disincentives delay in resolution, NARCL has to pay a Guarantee fee which increase with passage of time.
