FM approves Rs 30,000 crore govt guarantee against bad loans

The Union Cabinet on Thursday (September 16) gave its nod for government guarantee up to Rs 30,600 crore for security receipts to be issued by National Asset Reconstruction Company Limited (NARCL), which will take over bad loans worth Rs 2 lakh crore from banks.

“NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts,” said Finance minister Nirmala Sitharaman during a press conference following the Cabinet meeting.

Sitharaman said that guarantees, however, can only be invoked by banks on resolution or liquidation of the said assets. “The NARCL will take up bad loans from lenders worth Rs 2 lakh crore, of which Rs 90,000 crore will be transferred in the first phase,” the FM said. NARCL was set up by banks to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore.

NARCL has been formed under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset Reconstruction Company (ARC).

Also read: For the first time, Tata may appoint a CEO ‘to expand further’

The FM is aware of the large stock of legacy NPAs, which required the finance ministry to create alternatives. The guarantee (valid for five years) of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL.

“I had announced in Budget 2021-22 with an intention to set up an asset reconstruction company and an asset management company to take over the existing stressed assets like loans,” Sitharaman said.

Sitharaman said the Centre has executed its 4Rs strategy: recognition; resolution; recapitalisation; and reforms, to recover over Rs 5 lakh crore. She said that reforms in the banking sector have turned losses into profits.

“In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses,” she said.