Finance Ministry is targeting stressed assets transfer of ₹1 lakh crore to the National Asset Reconstruction Company Ltd (NARCL), colloquially referred to as Bad Bank, from State-owned banks by the end of March 2024, Vivek Joshi, Secretary, Department of Financial Services has said. 

“ There has been lot of progress since then (FM’s Review Meeting). We are targeting ₹1 lakh crore assets transfer mark by March this year”, Joshi told businessline in an interview. 

When the bad bank started operations, the initial aim was to get as much as ₹2 lakh crore of stressed assets transferred from the public sector banks. 

• BL Explainer: What is a Bad Bank?

In December last year, Finance and Corporate Affairs Minister Nirmala Sitharaman directed NARCL and banks to hold regular meetings to expedite the on-boarding of stressed accounts.   This intervention aimed to bridge the gap between NARCL’s efforts and the banks’ reluctance, ensuring the Bad Bank doesn’t become a failed experiment. 

Banks have been reluctant to transfer stressed assets to the bad bank in the wake of a price expectation mismatch between them and NARCL and seemingly low offers made by the latter.

Joshi said that he will hold another review meeting on NARCL performance on February 8 (Thursday) with chief executives of public sector banks and Bad Bank representatives. 

Essentially, a Bad Bank serves as an entity that consolidates a bank’s bad loans or non-performing assets (NPAs) and works towards resolving or liquidating these stressed assets to recover maximum value. In India, NARCL acquires these loans by paying 15% of the amount in cash and the remainder in government-guaranteed SRs, which banks can invoke during the resolution or liquidation of bad loans.

As on date, NARCL, which emerged on the scene in mid-2021, has acquired eight accounts with loan exposure amounting to ₹58,000 crore. Swiss challenge has been initiated on two accounts with loan exposure of ₹10,000 crore .

In the case of nine accounts with bank loan exposure of ₹20,000 crore, the Swiss challenge is about to be started. Also, due diligence is underway in 23 accounts with aggregate exposure of ₹60,000 crore.

In September 2021, a government guarantee facility of ₹30,600 crores was instituted for the security receipts (SRs) issued by NARCL. This measure was aimed to bolster confidence in the Bad Bank and facilitate its acquisition of distressed assets from lenders.

NO NARCL-IDRCL MERGER 

Meanwhile, Joshi ruled out any merger between NARCL and India Debt Resolution Company Ltd (IDRCL). “There are advantage of this structure. This structure helps in attracting good talent”, he noted.

While public sector banks primarily owns NARCL, , IDRCL is mainly owned by private sector with public sector banks accounting for 49% of the stake.

• Read: Can NARCL transition from a struggling toddler to a marathon runner?

Some industry observers questioned the necessity of the two-entity structure involving NARCL and IDRCL, arguing that a single entity might be more effective. Furthermore, the absence of a vibrant secondary market for SRs and a robust turnaround mechanism for purchased assets undermined confidence among private investors, they noted.

Relative to gross advances, the (gross non-performing assets (GNPAs) of Scheduled Commercial Banks (SCBs) rose almost five-fold from 2.2 per cent in FY11 to 11.2 per cent in FY18 as loans extended in the boom years of 2003-08 and again between 2012 and 2014 turned sour. 

However, there has been significant improvement in the banking sector’s health (asset quality) in recent years. 

Even as credit growth surged, asset quality across all SCB groups kept improving, with GNPAs and Net NPAs relative to the total advances dropping to a multi-year low in September 2023, a recent finance ministry report highlighted.