The Union Cabinet, chaired by Prime Minister Shri Narendra Modi, has approved Central Government guarantee of Rs.30,600 crore to back Security Receipts (SRs) issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.  This is in line with Budget announcement for the FY 2021-22.

The SRs issued by NARCL shall be backed by sovereign guarantee of Government of India. The Gol's guarantee shall be for Rs.30,600 crore and shall be valid for five years. Gol's guarantee can be invoked by NARCL for meeting the shortfall between the face value of the SR and the actual realization upon resolution / liquidation. NARCL shall be liable to pay annual guarantee fee.

Benefits:

The NARCL - IDMCL structure will assist in consolidation of debt, currently fragmented across various lenders, thus leading to faster, single point decision making including through IBC processes, where applicable. It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. India Debt Resolution Company Limited (IDRCL) will engage market expertise for value enhancement. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Gol's guarantee will also enhance liquidity of SRs as such SRs are tradable.

Background:

Government's 4 R strategy of Recognition, Resolution, Recapitalisation and Reform has led to a turnaround in performance of Public Sector Banks (PSBs). High levels of provisioning of legacy NPAs has presented an opportunity for additional measures for faster resolution. The Union Budget 2021-22 had accordingly announced Government's intention to set up an Asset Reconstruction Company (ARC) along with an Asset management Company AMC to consolidate and take over existing stressed debt and thereafter manage and dispose it off to buyers for value realization.

The National Asset Reconstruction Company Limited (NARCL) and India Debt Resolution Company Limited (IDRCL) have since been set up by banks. NARCL proposes to acquire stressed assets of about Rs. 2 Lakh crore in phases within extant regulations of RBI. It intends to acquire these through 15% Cash and 85% in Security Receipts (SRs).

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