Current Affairs 2022 : National Asset Reconstruction Company

By Tanieya Kumari

National Asset Reconstruction Company Limited was incorporated under the Companies Act to expedite the process of asset monetisation and reconstruction. Read here in detail about the working and impact of National Asset Reconstruction Company limited in India.

Many sectors have been severely impacted by the COVID-19 outbreak and the resulting restrictions on economic activities. The Government of India and leading experts in the financial services industry saw the need for an institutionalised approach, involving an ARC Aggregator of Debt and an AMC – Resolution Manager, to deal with legacy NPAs and manage the anticipated large-scale increase in NPAs as a result of the pandemic.

As a response, the National Asset Reconstruction Company Limited (NARCL), a one-of-a-kind strategic project funded by the Indian government, was proposed. NARCL was established under the Companies Act and has applied for a license as an Asset Reconstruction Company with the Reserve Bank of India (ARC). Banks created NARCL to collect and consolidate stressed assets in preparation for resolution. NARCL will remain 51 per cent owned by PSBs. IBA, which was tasked with establishing the bad bank, has set up a preliminary board for NARCL. By making an offer to the lead bank, the NARCL will be able to acquire assets. IDRCL will be hired for management and value addition once NARCL's offer is accepted.
P.M. Nair, a stressed assets expert from the State Bank of India (SBI), has been appointed as the company's managing director.

IBA CEO Mehta, SBI deputy managing director S.S. Nair, and Canara Bank Chief General Manager Ajit Krishnan Nair are the other board members. In Budget 2021-22, Finance Minister Nirmala Sitharaman stated that the high level of provisioning by public sector banks for stressed assets necessitates measures to clean up bank books. In her Budget speech, she stated, "An Asset Reconstruction Company Limited and an Asset Management Company will be established to consolidate and take over the existing stressed debt." She had stated that it will manage and sell the assets to alternative investment funds and other possible investors for eventual value realisation.

The NARCL will use an ARC-AMC structure to handle legacy NPAs by aggregating debt in the ARC and implementing a resolution strategy guided by the AMC, which will engage industry experts to help with resolutions. The structure offers a very appealing proposition for the whole Indian banking system, which would benefit in two ways: first, by selling their stressed assets, and second, by investing in NARCL and potentially earning higher returns through asset consolidation and turnaround. Its goal is to resolve stressed loan assets of more than 500 crores each, totalling around 2 lakh crore. 

Bankers and leaders in the financial services industry have embraced the concept and pledged to invest in it. The concept is projected to assist the lending community in the following ways:

• 15 per cent cash recovery upfront, with the rest covered by 5-year GOI-backed SRs.
• Because of the aggregation and expert resolution, there is a lot of upward potential.
• Reduced gross nonperforming assets on the books to boost selling lenders' equity prices.
• Selling lenders will be able to raise funds through new means.
• Management bandwidth has been reallocated to credit delivery and growth.

SBICAP has been involved in the development of the NARCL since its inception and is currently serving as project manager for the establishment of India's first Bad Bank. Apart from conceptualising the solution, our team of professionals is assisting in the structure of the bank, identifying assets, and raising debt/equity, among other things. The Union Cabinet has authorised a Central Government guarantee of Rs.30, 600 crores to support Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets. Within RBI's current standards, NARCL wants to buy stressed assets worth around Rs. 2 lakh crore in stages. It plans to buy them for 15% cash and 85% in Security Receipts (SRs).

In the first phase, banks have identified roughly 22 problematic loans totalling Rs 90,000 crore that will be transferred to NARCL.

Follow here for More Current Affairs Topics