Asset Reconstruction Company to quicken bad loan resolutions: RBI report

Creation of a dedicated bad bank is the first step in resolving the long-standing bad-loan problem, the central bank said, underscoring the importance of the new platform in helping extract debt that has turned sour.

“This would incentivise quicker resolution and help better value realisation,” the central bank’s Financial Stability Report (FSR) said. “Despite several efforts, a substantial stock of legacy NPAs continues to be on the balance sheets of banks.”

The National Asset Reconstruction Co (NARCL) is one of the two legs of the proposed government-sponsored bad bank. India Debt Resolution Company Ltd (IDRCL), an asset manager, helps complete the dedicated platform.


“The establishment of NARCL is expected to aid the recovery process, while alleviating stress on banks’ balance sheets,” the central bank said.

NARCL will initially acquire non-performing assets with total secured outstanding exposure of Rs 500 crore and above, amounting to about Rs 2 lakh crore. Following extant guidelines, it will acquire these assets through 15 percent upfront payment in cash and 85 percent security receipts (SRs), a tradable security.

NARCL, being incorporated by financial institutions only, will have the ability to aggregate bad loans from all members of the consortium.

NARCL is capitalised through equity contributions from banks/financial institutions (FIs). It will also raise debt as and when required. Public sector banks and state-owned financial institutions are majority shareholders holding a minimum of 51 per cent stake. The rest will be with the private sector lenders.

The bad bank is set to begin operations in the second week of January as it is currently in the process of recruitments, ET wrote on December 26.