In news- The Indian Banks’ Association (IBA) will shortly submit a request to the Reserve Bank of India (RBI) for the establishment of a Rs. 6,000-crore National Asset Reconstruction Company Ltd (NARCL) or bad bank.
What is a Bad Bank?
- A Bad Bank is an Asset Reconstruction Company (ARC).
- ARC or Bad Bank buys bad loans from the commercial banks at a discount and tries to recover the money from the defaulter by providing a systematic solution over a period of time.
- It will manage these Non-Performing Assets in suitable ways, some may be liquidated, others may be restructured, etc.
- The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints.
- The state-run Punjab National Bank (PNB) put its entire 10.01% stake in Arcil, one of India’s oldest ARCs with assets worth Rs. 12,000 crore under management, for sale in February 2021.
- It was followed by private lender IDBI Bank, which, too, has begun looking for a buyer to sell its 19.18% stake in Arcil.
- Similar talks are underway to divest ownership in ASREC (India) Ltd, a Mumbai-based ARC.
- Three public sector banks Union Bank of India, Indian Bank and Bank of India said they jointly intend to sell up to 88.4 million shares, constituting up to 90.31% of the total equity share capital of ASREC.
- There are also eight other banks including SBI, Canara Bank and Bank of Baroda are underway to divest ownership in ASREC (India) Ltd.
- SBI Capital Markets Ltd (SBI Caps) has been mandated as the sell-side adviser for the transaction.
- It has stipulated that a potential bidder “should have a net worth of not less than ₹100 crore or should have assets under management of not less than ₹500 crore”.
- According to RBI data, 7.5% of all bank loans had turned bad by the end of March 2021.
- With NARCL coming into being, the major positive feature is that it will not face the problem of aggregating debt, a problem that ARCs have been facing for a long time.
ASREC (India) Limited-
- ASREC is a Public Limited Company incorporated under the Companies Act 1956 has been granted certificate of registration by RBI on October 11, 2004 to carry out activities under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.
- The Company acquires Non Performing Assets (NPAs) from the Banks / Financial Institutions at mutually agreed prices with the objective is to maximise the returns through innovative resolutions strategies.
- ASREC positions itself as the multi lender ARC in the public sector aiming to earn the confidence of the financial system in the effective resolution of NPAs by operating in a transparent manner with flexibility of the private sector.
National Asset Reconstruction Company Ltd ( NARCL)-
- NARCL, or the so-called bad bank, has been registered in Mumbai with a paid-up capital of Rs. 74.6 crore, citing filings with the Registrar of Companies (RoC).
- The bad bank will be headed by Padmakumar Madhavan Nair, a stressed assets expert from State Bank of India (SBI), as managing director.
- NARCL will house bad loan accounts of Rs.500 crore and above.
- Establishing NARCL is part of the government’s efforts to clean up the financial system, which is sitting on one of the biggest piles of bad assets in the world.
- It is expected that the warehousing of bad loans by NARCL will allow banks to cut losses and renew lending.
The idea of a bad bank has been tried out in countries such as the United States, Germany, Japan and others in the past.