Bad Bank finally gets all regulatory approvals; Rs 50,000 cr bad loans to be transferred in phase I

The Bad Bank is finally becoming a reality after much regulatory delays. All requisite approvals for setting up of National Asset Reconstruction Company Ltd (NARCL) and India Debt Resolution Company Ltd (IDRCL) including from Reserve Bank of India (RBI), have now been received and both the companies are ready to commence their business. This is as envisaged by Finance Minister, in her budget speech on 1 February 2021. Salient features of the arrangement are:

• NARCL, also popularly known as the Bad Bank, will acquire and aggregate the identified NPA accounts from Banks while IDRCL under an exclusive arrangement will handle the debt resolution process
• This exclusive arrangement will be as per the scope defined in the ‘Debt Management Agreement’ to be executed between the 2 entities
• This arrangement will be on a ‘Principal-Agent’ basis and final approvals and ownership for the resolution shall lie with NARCL as the Principal. This is as per the structure originally envisaged.
• This arrangement will also be in full conformity with provisions of SARFAESI Act as well as Outsourcing guidelines of Reserve Bank of India. Both the companies will comply with applicable Regulatory guidelines at all times
• Public Sector Banks have taken a majority ownership in NARCL and IDRCL will be majorly owned by Private Sector Banks
• This unique Public Private partnership is envisaged to get the best talent in terms of ability to handle large exposures, benefit of aggregation, domain expertise in O&M and debt resolution processes, with personnel on boarded on terms and conditions that are market driven
• NARCL plans to acquire the identified assets on a 15:85 – Cash: Security Receipt (SR) structure and these SRs issued in favour of transferring lenders will be secured by Govt of India guarantee for its face value.

Both the companies have their respective Boards in place, consisting of seasoned professionals from the market. To start with both companies are having their MD & CEOs on secondment basis. Padmakumar Nair, a Chief General Manager from SBI’s Stressed Assets vertical will manage NARCL while Shri Manish Makharia, Head of Alternate Investment Fund, SBI Funds Management Pvt Ltd will be heading IDRCL.

Subrata Biswas, the nominee director on the Board of NARCL will be the interim Chairman and Diwakar Gupta continues as the Chairman of IDRCL.

A total of 38 accounts aggregating to Rs. 82,845 Crs have been identified for transfer to the Bad Bank, however the transfer will happen in a phased manner. Under Phase I, about 15 accounts, aggregating to Rs. 50,335 Crs are expected to be transferred in the current financial year, i.e. on or before 31st March 2022.

IDRCL is expected to bring in superior resolution techniques, preserve the value, show-case brown field assets and attract domestic as well as foreign investors, Alternate Investment Funds, etc. This will maximize the value for all stakeholders. This mechanism is also expected to free up capital for the lending banks for deployment.

Also Read: Banks Gross NPAs may increase 120 bps to 8.1% by September ’22: RBI Financial Stability Report