All PSBs, REC to buy stakes in bad bank; Indian Banks’ Association files application for incorporation of NARCL

A top banker had last week said the cost to the exchequer won’t exceed Rs 30,600 crore, as estimated by the IBA, as the prospects of recovery from some of the bad loans looked promising.

The Indian Banks’ Association (IBA) has filed an application with the corporate affairs ministry for the incorporation of the National Asset Reconstruction Company (NARCL), which will pave the way for its swift operationalisation, banking sources told FE.

Not just large lenders but all public-sector banks (PSBs), barring Punjab & Sind Bank, have evinced interest in picking up stakes in the so-called bad bank, one of the sources said.

The IBA – which is spearheading the initiative to set up the NARCL – has also held talks with REC, seeking its contribution to equity, he added. “The discussions with REC (which finances rural electrification projects) have been moving towards a positive outcome,” the source said. No private bank has yet agreed to put in capital but talks are still on.

While Canara Bank has announced it would be the sponsor of the NARCL and hold a 12% equity, other large banks are expected to pick up just about 10% each. Punjab National Bank (PNB) managing director and chief executive SS Mallikarjun Rao has said his bank would hold under 10% in the bad bank, while Union Bank of India MD & CEO and IBA chairman Rajkiran Rao G has said the lender would buy 9%. PNB and Union Bank have identified bad loans worth about Rs 8,000 crore and Rs 7,800 crore, respectively, for transfer to the NARCL.

Meanwhile, the IBA has finalised the article of association as well as memorandum of association for the NARCL so that the asset reconstruction company takes off quickly.

Sources had earlier told FE that the finance ministry could soon seek Cabinet approval for a plan to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL while acquiring bad loans from lenders. This would cost the government Rs 30,600 crore over five years.

A top banker had last week said the cost to the exchequer won’t exceed Rs 30,600 crore, as estimated by the IBA, as the prospects of recovery from some of the bad loans looked promising.

Though the government has backed the setting up of the NARCL, announced in the Budget for FY22, it wouldn’t infuse capital into it; instead, participating banks would put in the equity. Nevertheless, it is set to give guarantee on the SRs to make the bad loan resolution process more viable and attractive.

An asset management company, comprising professionals, will also be set up within the broader NARCL structure, which will work out the toxic assets and take appropriate decisions, including on selling them off to investors.

Financial services secretary Debasish Panda had earlier said banks would have the option to transfer several large stressed assets (of at least Rs 500 crore each) worth Rs 2.25 lakh crore to NARCL initially. The IBA is also working out an “exit strategy” for those accounts that remain unresolved even after five years.

Of the 101 non-performing assets (NPAs) initially reviewed, banks have zeroed in on 22 accounts amounting to roughly Rs 89,000 crore for transfer to NARCL in the first phase.

NARCL is expected to acquire stressed assets at net book value by offering 15% of it upfront (in cash), and the rest (85%) in SRs. Once the bad loan is resolved, realisation for the relevant bank would be in sync with its SR interest in that asset.