Bad Banks to take NPAs off bank Books and solve 2 Cr Bank Bad Loans: How it works

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After a decade of debate, the Bad Bank has finally arrived. It wants to assist banks to clean up their records by taking over bad loans worth Rs 2 lakh crore. According to analysts, if Bad Bank operates as intended, it might help lower system-wide bank NPAs (non-performing assets) by over 1% and collect some bad debts.

The National Asset Reconstruction Company (NARCL), as it is officially known, would purchase bad debt from banks to settle or liquidate them. It will pay cash and government-guaranteed security receipts for these troubled assets.

The Union government will guarantee Rs 30,600 worth of security receipts issued by the National Asset Reconstruction Company, according to Finance Minister Nirmala Sitharaman (NARCL). “NARCL would acquire stressed assets by paying banks 15% in cash based on value and the remaining 85% in security receipts,” Nirmala Sitharaman explained. Security receipts backed by the government can only be used in the event of a resolution or liquidation.

What exactly is NARCL? What is the purpose of it?

The Finance Minister proposed the National Asset Reconstruction Company (NARCL) in her Union Budget speech. NARCL, sometimes known as Bad Bank, is a bank-owned asset reconstruction firm that will help banks resolve stressed assets and improve their operations. NARCL will be 51 percent owned by public sector banks. The bad bank plans to address stressed loan assets valued at more than Rs 500 crore.

How will the Bad bank work

Bad loan transfer: NARCL will take over bad loans worth Rs 2 lakh crore from banks, with the first phase covering Rs 90,000 crore. NARCL would buy problematic loans from banks for a mutually agreed-upon price, according to the Ministry of Finance (understandably, a net value after a haircut). NARCL will pay 15% of the agreed net value of the bad debt in cash upfront, with the remaining 85% paid in security receipts. This 15% cash up front would be used by the banks to reverse the debt write-down.

“These loans are fully supplied in the bank’s books,” says the provision write-back. The upfront payment received, equal to 15% of the written-down value, would be reversed, while the provisions for the balance (value of security receipts) would be unlikely to be reversed even if fully provided,” Kotak Securities analysts stated in a note. Any greater provision releases, if any, would be made as and when cash is collected on the sale of these receipts or the redemption of security receipts. The government guarantee on SRs may make it possible to trade these securities, according to Kotak Securities.

The security receipts issued by NARCL are backed by a guarantee from the Union government. Any difference between the face value of the receipts and the actual realization value of the bad loan will be covered by the government guarantee.

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