FM Nirmala Sitharaman announces govt guarantee worth Rs 30,600 cr for 'bad bank'

Finance Minister Nirmala Sitharaman, during a press conference today, said the Union Cabinet has approved the central government guarantee of up to Rs 30,600 crore to back security receipts to be issued by the National Asset Reconstruction Company Limited (NARCL), also known as the bad bank.

The NARCL will take over the bad loans from public sector banks and ensure professional management of bad loans, said Sitharaman, adding the government guarantee will be valid for 5 years.

"National Asset Reconstruction Company Limited will aggregate NPAs in banks' balance sheets (for which full provisioning has been done) and manage and dispose of them professionally, this will thus clean up banks' balance sheets," the FM said.

PSBs will have 51 per cent ownership in NARCL, while PSBs and public financial institutions will have a maximum of 49 per cent stake, the FM said.

Around 15 per cent cash payment will be made to banks for non-performing assets based on some valuation, while 85 per cent will be given as security receipts. "For security receipts to have their value intact, the government has to give backstop arrangement, hence the government guarantee of Rs 30,600 crore," she added.

The government guarantee can be invoked by NARCL for meeting the shortfall between the face value of the security receipt and the actual realisation upon resolution or liquidation.

She said Budget 2021 had announced the government's intention to set up an Asset Reconstruction Company (ARC), along with Asset Management Company, to consolidate and take over existing stressed debt and thereafter manage and dispose them off to buyers for value realisation.

She said in 2015, an asset quality review of banks had happened, which revealed a high incidence of non-performing assets. The government then, she said, had come up with a 4-R strategy of "Recognition, Resolution, Recapitalisation and Reforms" for the public sector banks.

After the recognition, the quantification of non-performing assets started in a planned manner, she said, adding that recovery, too, started showing results.

The FM said in the past six financial years, the 4Rs were executed meticulously, and the banks have recovered Rs 5,01,479 crore. Out of Rs 5,01,479 crore recovered by banks during the last six years, Rs 3.1 lakh crore has been recovered since March 2018. In 2018-19 alone, a record Rs 1.2 lakh crore has been recovered, she said.

Of this, Rs 99,996 crore comprises the amount recovered from written off assets, she added.

As part of the bank recapitalisation, the government infused Rs 90,000 crore in 2017-18; Rs 1.06 lakh crore in 2018-19; Rs 70,000 crore in 2019-20; Rs 20,000 crore in 2020-21; and Rs 20,000 crore in 2021-22.

Sitharaman said public sector banks are now not only making profits, they are also raising money from the markets. "A total of Rs 58,697 crore has been raised by PSBs as debt and equity," she said.

"In 2018, only two of the 21 public sector banks were profitable. In 2021, only 2 have reported losses for the full year," she added.

Also read: Nirmala Sitharaman presser live updates: Rs 31,600 cr guarantee for Bad Bank approved, says FM