National Asset Reconstruction Company Limited

Why in news?

• Central Government guarantee of Rs.30,600 crore to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets was approved by Union Cabinet.

More about the news:

• NARCL proposes to acquire stressed assets of about Rs. 2 Lakh crore in phases within extant regulations of RBI.
• It intends to acquire these through 15% Cash and 85% in Security Receipts (SRs)

What is NARCL?

• NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC).
• NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain51% ownership in NARCL

What is India Debt Resolution Company Limited (IDRCL)?

• IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts.
• Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

Why is NARCL-IDRCL type structure needed when there are 28 existing ARCs?

• Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans.
• Various available resolution mechanisms, including IBC have proved to be useful.
• However, considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.

Why is a Government Guarantee needed?

• Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from Government.
• This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL.
• The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation.
• The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of Security Receipts as such Security Receipts are tradable.

How will NARCL and IDRCL work?

• The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

What benefit do banks get from this new structure?

• It will incentivize quicker action on resolving stressed assets thereby helping in better value realization.
• This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth.
• As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.

What will be the capital structure of NARCL and how much will Government contribute?

• Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs)
• It will also raise debt as required. The GoI guarantee will reduce upfront capitalization requirements.

PRACTICE QUESTION:

With reference to ‘National Asset Reconstruction Company Limited’, consider the following statements:

1. It has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.

2. Public Sector Banks will maintain 51% ownership in National Asset Reconstruction Company Limited

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer