India's very own Bad Bank is now live, with all approvals now in place to set up the National Asset Reconstruction Company Ltd (NARCL) and the India Debt Resolution Company Ltd (IDRCL) in place. The development comes just ahead of the Union Budget 2022, and almost a year after the bad bank was first announced in the Union Budget of 2021.

Banks have agreed to transfer 15 accounts with approximately Rs 50,000 crore outstanding to the NARCL in the first phase by the end of the fiscal year, said Dinesh Khara, the chairman of State Bank of India while announcing the development on Friday.

So far, banks have already identified 38 large stressed accounts with over Rs 500 crores of loans outstanding each to be transferred to the NARCL in phases, with the total outstanding at Rs 83,845 crores, Khara said. However, the total amount expected to be transferred to the NARCL has been scaled down to Rs 1.50 lakh crore from Rs 2 lakh crore estimated earlier.

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Dinesh Khara said this was because some assets identified last year were already resolved, while some that were declared as fraud have been excluded from the identified list. All identified accounts at 100 percent provided for by banks.

"The universe of Rs 2 trillion was identified on the basis of the Rs 500 crore and above the cut-off for the banking system being in the stressed asset's book. So, this book will be dealt with over a period of time either till it is resolved with the lenders or it gets transferred to NARCL," said J Swaminathan, managing director, State Bank of India, adding that for the remaining accounts, processes are still on in a phased manner and will happen over the next year.

The Reserve Bank of India's final nod was received after a new structure was proposed by the Indian Banks Association which would work with a principal-agent relationship between NARCL and IDRCL. While RBI had earlier issued an ARC licence to the entity, it had expressed reservations about the plan to transfer assets to an Asset Management Company, ie, IDRCL.

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"There were certain concerns being raised but eventually both entities have requisite approval,” Khara said, adding that while NARCL will acquire and aggregate identified NPA accounts from banks, IDRCL will handle the debt resolution process.

Banks will get 15 percent cash upfront while transferring bad loans to the NARCL, and the remaining 85 percent in the form of security receipts. The auction will be conducted with a Swiss Challenge method, and other ARCs would be allowed to participate and offer competitive bids. Public sector banks led by Canara Bank hold the majority stake in NARCL, and private banks will lead IDRCL, Khara said.

"The SRs which will be issued by the NARCL will be guaranteed to the extent of 85 percent by the government of India," Khara said, adding that IDRCL will independently help in resolving the assets.

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He added that IDRCL is expected to bring in superior resolution techniques, preserve value, and showcase the brownfield assets and attract domestic, foreign investors and alternative investment funds (AIFs). Aggregation and IDRCL’s expertise in stress resolution will aid in faster recoveries, Dinesh Khara said.

"This will maximize value for all stakeholders. It is also expected to free the bandwidth as well as capital for the lending bankers, which can be put to more gainful use," said Khara.

Padmakumar Nair, a chief general manager from SBI's stressed assets vertical will manage NARCL while Manish Makharia, head of Alternate Investment Fund, SBI Funds Management Pvt Ltd will be heading IDRCL. Subrata Biswas, the nominee director on the Board of NARCL will be the interim chairman and Diwakar Gupta continues as the chairman of IDRCL.

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(Edited by : Jomy Jos Pullokaran)

First Published:Jan 28, 2022 6:11 PM IST