Bad bank: government guarantee costs 30,600 crore rupees
The Association of Indian Banks (IBA) has estimated that the government may not have to shell out more than Rs 30,600 crore if it offers collateral on collateral receipts (SRs) issued by the National Asset Reconstruction Company (NARCL ) while acquiring bad debt from lenders, a top banker told FE.
“The prospects for the recovery of some of the bad debts look promising. Thus, the government guarantee on SRs, subject to its approval, cannot cost more than this amount. Details are being worked out by the IBA and NARCL will be operational soon, ”he said.
Although the government supported the creation of NARCL, it would not inject capital into it; instead, participating banks would invest the equity. Nonetheless, bankers expect the government to give a guarantee on SRs, which will make the resolution process more viable and attractive.
Earlier, Financial Services Secretary Debasish Panda said banks would have the option to transfer several large stressed assets (at least Rs 500 crore each) with an initial value of Rs 2.25 lakh crore to the NARCL.
The IBA, which is leading the effort to establish NARCL, focused on five consultants to speed up the process. She requested quotes from SBI Capital Markets and Oliver Wyman for advisory services; of E&Y for tax consultations; AZB & Partners for legal advice; and AON Consulting for HR services.
NARCL should acquire stressed assets at their net book value by offering 15% of these in advance (in cash) and the rest (85%) in SR. Once the bad loan is resolved, the realization for the affected bank would be synchronized with its SR interest in that asset.
The IBA is also developing an “exit strategy” for accounts that remain pending even after five years, the banker said.
Of the 101 non-performing assets (NPAs) initially examined, the banks focused on 22 accounts amounting to around Rs 89,000 crore for transfer to NARCL during the first phase.
Already, the IBA has formed a central committee headed by its chairman (Union Bank of India Managing Director Rajkiran Rai) for the establishment of NARCL and the Indian Asset Management Company. The committee also includes IBA Managing Director Sunil Mehta, State Bank of India Managing Director J Swaminathan, IDBI Bank Managing Director and CEO Rakesh Sharma, and ICICI Bank Executive Director Sandeep Batra.
The proposed asset management company, composed of professionals, will be set up within the larger structure of NARCL which will develop the toxic assets and make the appropriate decisions, including their transfer to investors.