The setting up of the National Asset Reconstruction Company Ltd. (NARCL), with a clear mandate and an explicit government guarantee, will help in alleviating the financial stress on commercial banks, per an article in the Reserve Bank of India’s latest monthly bulletin.
NARCL will be an additional mechanism for resolution of large stressed assets, complementing the activities of existing asset management companies.
“Going forward, continued commitment, professional staff and transparency in operation will help in making the exercise cost and time effective,” said RBI officials Snehal S Herwadkar, Arpita Agarwal and Sambhavi Dhingra in the article “Bad Banks as Good Samaritans: Lessons from Cross-Country Experience for India”.
At the same time, care needs to be taken to ensure that fresh slippages are arrested, and bank balance sheets are strengthened to avoid future build-up of stress.
Experience of international best practices suggests that the NARCL in India is likely to serve as a time-efficient mechanism, while reviving investor interest in primary as well as secondary markets for stressed assets and Security Receipts, respectively, the authors said.
Banks will be transferring 15 stressed assets aggregating about ₹50,000 crore by March-end 2022 to NARCL, State Bank of India Chairman, Dinesh Kumar Khara, had told the media late last month.
The aforementioned assets (above ₹500 crore each) are part of the 38 identified stressed assets aggregating ₹83,000 crore that banks will be transferring to NARCL.
RBI officials said, “Creation of a bad bank at the current juncture may prove helpful in reducing banking stress and kick-start the credit cycle.
“The cross-country evidence suggests that if the logistical and financial challenges are carefully navigated, experiments of centralised bad bank can have more hits than misses.”
They observed that while it may be unfair to hail them as a universal antidote to deal with financial stress, they have proven to be a worthwhile exercise when armed with conducive institutional frameworks.