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GA Topper Series : NARCL

What is NARCL ?

National Asset Reconstruction Company Ltd. (NARCL) is a Bad Bank. It was announced in the Budget for 2021-22. It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities. It was setup in September 2021.

What is NPA?

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

What is the present state of NPAs?

The total stress in the banking system would be in excess of Rs 15 lakh crore. The banks burdened with stressed assets and limited capital will find it difficult to manage the NPAs

What is an Asset Reconstruction Company (ARC)?

It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities.The asset reconstruction companies or ARCs are registered under the RBI.

 

NARCL, IDRCL ARC, NPA, Bad Bank, Security Receipts in Hindi

 

Were there no Bad banks earlier ?

Existing ARCs have been helpful in the resolution of stressed assets, especially for smaller value loans. They were majorly private in nature. They donot have the funds to acquire big loans

How NARCL is different from previous established ARCs?

The new entity is being created in collaboration with both public and private sector banks.

Majority-owned by state-owned banks, the NARCL will be assisted by the India Debt Resolution Company Ltd (IDRCL), in turn majority-owned by private banks, in resolution process in the form of a Principal-Agent basis.

Public Sector Banks (PSBs) will maintain 51% ownership in NARCL.

Under which act ARCs are set up ?

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.

What are the Capital Needs for setting up of ARCs?

As per amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores. The RBI raised this amount to Rs. 100 crores in 2017.

The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets.

Under which act NARCL is been setup?

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.

What is IDRCL ?

IDRCL is 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.

How NARCL-IDRCL will work?
TheNARCL will first purchase bad loans from banks. the plan is to create a bad bank to house bad loans of ₹500 crore and above

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 raisewill 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.

What are security receipts?

Security receipts are defined under section 2(1) (zg) of SARFAESI Act.

It means a receipt or other security, issued by an asset reconstruction company to any qualified buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder, thereof, of an undivided right, title or interest in the financial asset involved in securitization.

How Bad Bank will help commercial banks?
Commercial banks are saddled with high NPA levels, setting up of the Bad bank will help.That’s because such a bank will get rid of all its toxic assets, which were reducing its profits, in one quick move.When the recovery money is paid back, it will further improve the bank’s position. Meanwhile, it can start lending again.

Who is the MD and CEO of NARCL?

Former State Bank of India exexutive Natarajan Sundar has joined National Assets Reconstruction Company Ltd (NARCL) as managing director and CEO.

Who is the MD and CEO of IDRCL ?

The chief executive of India Resurgence Asset Reconstruction Company (IRARC), Avinash Kulkarni, has been selected to head the India Debt Resolution Company (IDRCL).

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