One-stop solution to bad loan menace is 'legally born'

The National Asset Reconstruction Company Ltd (NARCL)—or the “bad bank”—that was set up on July 7, has been registered in Mumbai with a paid-up capital of Rs 74.6 crore, according to the Registrar of Companies (RoC) filings.

Padmakumar Madhavan Nair, a stressed assets expert from State Bank of India (SBI) will be its managing director. The other three directors are Indian Banks’ Association (IBA) chief executive Sunil Mehta, SBI deputy managing director Salee Sukumaran Nair and Ajit Krishnan Nair of Canara Bank.

Touted as a one-stop solution to India’s burgeoning bad loan problem, the NARCL has been set up with an authorised capital of Rs 100 crore and classified as a “Union government company”, the RoC filings showed.

A source aware of the development told Hindustan Times that now NARCL would have to seek an ARC licence from the Reserve Bank of India. “The NARCL will start operations shortly after the approvals come,” said the source.

Clean-up of financial system

In the Budget for FY22, it was announced that the NARCL would house bad loan accounts worth Rs 500 crore or more. Its structure would comprise an asset reconstruction company (ARC) and asset management company (AMC) to manage and recover dud assets. The AMC is yet to be set up.

When the NARCL starts operations, banks can transfer their soured loans to it, allowing them to cut their losses and renew lending.

Bad loans worth Rs 2 lakh crore are likely to be transferred to the NARCL in tranches, with an initial transfer of 22 such accounts worth Rs 89,000 crore by state-run banks.

Advantage of NARCL

It goes without saying that the main benefit of the NARCL will be in its ability to aggregate bad loans unlike an ARC, for which it is not always possible to buy the total exposure of the banks to the borrower while buying such assets. This often leads to a delay in the recovery of the bad loans.

However, the NARCL will not face the problem of aggregating debt, recently the Hindustan Times reported quoting Pallav Mohapatra, chief executive of Asset Reconstruction Co (India) Ltd. “Now, they will be able to do debt recasts as there will be no other bank to have contradictory views,” said Mohapatra to HT.

Canara Bank has sponsored the NARCL, while other public sector lenders such as Union Bank of India and Punjab National Bank will also have stakes in it.

Besides filing an application with the MCA last month to incorporate the NARCL, the IBA had also sought approval for India Debt Management Company for managing bad debt in the system. While the NARCL is a registered company now, IDMCL’s registration is yet to be done.