Finance minister Nirmala Sitharaman sets up framework for bad bank

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The Union finance minister Nirmala Sitharaman announced that the cabinet has approved the issue of government guarantees up to Rs 30,600 crore for security receipts by the National Asset Reconstruction Company (NARCL) or a bad bank. In an aim to cater to the resolution of big-ticket non-performing assets (NPAs) or bad loans, Sitharaman had stated in the budget speech that Asset Reconstruction Company Limited and Asset Management Company.

Around 85% of government-guaranteed security receipts and up to 15% of the agreed value for the loans in cash will be paid by NARCL. In case of loss against the threshold value, the government guarantee will be invoked.

The announcement was made in line with the proposal to set up the NARCL to aggregate the toxic assets that have been lying for a long time. Sitharaman said that in the last six fiscal years, the banks have recovered Rs 5,01,479 crore, with 4Rs framework- Recognition, Resolution, Recapitalisation, Reforms. Of this, Rs 3.1 lakh crore has been recovered since March 2018. The Centre will also set up an India debt resolution firm apart from NARCL.

Sitharaman also divulged details on how over a few years centre has been working on reforming the banking sector. The RBI has been taking steps to reform the sector. She said that public sector banks are now raising funds through equity and debt markets and are not solely waiting for the government.

“In 2018, two out of 21 PSB were profitable. In 2020-21, only two public sector lenders reported a loss for the full year,” she added.

On September 15, as per reports, the government had approved a proposal for the resolution of bad loans, that stated National Asset Reconstruction Company (NARCL) will issue government guarantee to security receipts.  Earlier, an application was submitted by IBA for a licence to set up a Rs 6,000-crore NARCL, to the Reserve Bank of India (RBI). IBA is also assigned the task of setting up a bad bank.