Banks have identified around 22 bad loans worth Rs 89,000 crore to be transferred to the National Asset Reconstruction Company Ltd (NARCL) in the initial phase.

What is the purpose of NARCL?

• NARCL is the name coined for the bad bank announced in the Budget 2021-22. A bad bank refers to a financial institution that takes over the bad assets of lenders and undertakes resolution.

• Last year, the Indian Banks’ Association (IBA) had made a proposal for the creation of a bad bank for swift resolution of non-performing assets (NPAs). The government accepted the proposal and decided to go for asset reconstruction company (ARC) and asset management company (AMC) model for this.

• Finance Minister Nirmala Sitharaman announced in the Budget 2021-22 that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

• To facilitate the smooth functioning of asset reconstruction companies, the RBI had decided to set up a panel to undertake a comprehensive review of the working of such institutions.

• After enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable the development of this sector and to facilitate the smooth functioning of these companies.

• Since then, while ARCs have grown in number and size, their potential for resolving stressed assets is yet to be realised fully.

• An ARC may issue bonds and debentures for meeting its funding requirements. However, the unique source of funds for the ARCs is the issue of Security Receipts. Sections 7(1) & (2) of the SARFAESI Act provide for issue of Security Receipts after acquisition of any financial asset to qualified institutional buyers (QIBs) and raising of funds from the QIBs by formulating schemes for acquiring financial assets. 

• The banks have identified the accounts where there are almost close to 100 per cent provisions and are above Rs 500 crore in exposure.

• The 22 accounts are those where the lead banks have already conducted meetings with other banks and got an in-principle approval to transfer to the ARC whenever formed.

• Once the ARC is formed, the management will look at these assets and only when they find that it is worthwhile buying, they will make an offer.

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