The ₹30,600-crore back-stop the Centre proposes to extend as guarantees to the Security Receipts to be issued by National Asset Reconstruction Company Ltd (NARCL), or the so called bad bank, will be valid for five years, Finance Minister Nirmala Sitharaman said on Thursday.

Briefing newspersons here on the contours of the scheme, approved by the Cabinet on Wednesday, Sitharaman said that the government guarantee can be invoked to cover the shortfall between the amount realised from the underlying asset and the face-value of the Security Receipt issued for it.

Finer details

NARCL, with a ₹30,600-crore back-stop, and the slew of measures taken from 2015 (beginning with the asset quality review of banks), completes the full cycle of cleaning up public sector banks by removing their NPAs and making recoveries through a specialised organisation, she added.

On why the government should guarantee NARCL’s Security Receipts, Sitharaman said the resolution mechanisms of this nature, which deals with a backlog of NPAs, typically require a back-stop from the government. This imparts credibility and provides for contingency buffers.

The government guarantee is also expected to enhance the liquidity of SRs, which is tradable. The existing ARCs are not equipped to deal with large legacy NPAs, and the government joining hands with public sector banks does have an effect on the outcomes, she noted.

“The condition precedent for invocation of government guarantee will be resolution or liquidation. Further, to disincentivise delay in resolution, NARCL has to pay a guarantee fee that increases with passage of time. Through this, we are ensuring speedy disposal of assets,” Sitharaman said.

The Minister said that ₹30,600-crore guarantee will be available for stressed assets of ₹2-lakh crore, of which as much as ₹90,000 crore will get transferred from banks to NARCL in the first phase.

For this transfer, NARCL will pay banks 15 per cent cash and 85 per cent in Security Receipts.

Resolution mechanism

Debashish Panda, Secretary, Department of Financial Services, said the guarantee will be a contingent liability for the government and as such there is no immediate impact on the fisc. He said that 16 banks and NBFCs are coming together for NARCL and that public sector banks will have 51 per cent stake in it.

Sitharaman said the India Debt Resolution Company Ltd has already been set up and will function as the asset management company. It will be a service company/operational entity that will manage the assets and employ market professionals and turnaround experts.

Public sector banks and public financial institutions will hold a maximum of 49 per cent stake with private lenders owning the rest.

Sitharaman also said that the meticulous execution of the 4 Rs — Recognition, Resolution, Recapitalisation and Reforms — strategy since 2015 had served the banking system well.

In the last six fiscal years, banks had made recoveries of ₹5.01-lakh crore with as much as ₹3.1-lakh crore since March 2018. In 2018-19, banks recovered a record ₹1.2-lakh crore, she added.

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