BAD BANK Structure - NARCL & IDRCL

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BAD BANK Structure
  • Recently, the Union Cabinet approved the Rs 30,600 crore guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.
  • The NARCL is a part of a new Bad bank structure that was announced in the Budget 2021.
NARCL:
  • 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).
  • NARCL will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
  • Public Sector Banks (PSBs) will maintain 51% ownership in NARCL.
IDRCL:
  • Another entity, India Debt Resolution Company Ltd (IDRCL), will then try to sell the stressed assets in the market.
  • PSBs and Public Financial Institutes (FIs) will hold a maximum of 49% stake in IDRCL. The remaining 51% stake will be with private-sector lenders.
  • The NARCL-IDRCL structure is the new bad bank structure.
Working of NARCL-IDRCL and Guarantee Offered:
  • The NARCL will first purchase bad loans from banks.
  • It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
  • When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
  • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
  • The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.
  • This guarantee is extended for a period of five years.

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