India creates BAD BANK to clean up mess of bad loans |
India has set up a BAD BANK for a major clean-up of bad loans in the banking system. The Indian Cabinet of Ministers on 16th Septeber 2021 cleared a 5-year guarantee programme of just over US$ 4 billion for securities to be issued by the newly incorporated `bad bank` for taking over and resolving non-performing assets (NPAs) amounting to nearly US$ 27 billion. The Reserve Bank of India is in the process of granting a licence for the National Asset Reconstruction Company Limited (NARCL). Toxic assets worth US$ 12 billion with other banks will move to the NARCL. The government wants to finish the process it started in 2015 to clean up bad loans. The NARCL will acquire assets by making an offer to the lead bank. Private sector asset reconstruction (ARCs) firms may also be allowed to outbid the NARCL. Separately, public and private lenders will combine forces to set up an India Debt Resolution Company (IDRC) that will manage these assets and try to raise their value for final resolution. Once the NARCL and the IDRC have finally resolved the asset, preferably not through liquidation proceedings, the balance 85% held as security receipts would be given to the banks. The government steps in only to pay the gap between the realised value and the face value of those receipts and for only five years, said Indian Finance Minister Nirmala Sitaraman. Public sector banks will have a 51% ownership in the NARCL, while their shareholding along with that of public sector financial institutions will be capped at 49% for the IDRC. Private lenders bringing in the rest of the equity capital. Some 16 banks, including private players, would put up about US$ 800 million as equity for the NARCL.
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