Cabinet may soon approve the proposal of government guarantee for bad banks

New Delhi : The Union Cabinet may soon approve a proposal to provide government guarantee to the receipts of National Asset Reconstruction Company (NARCL), to be set up for the purpose of resolution of bad loans. The Indian Banks’ Association (IBA) has estimated the government guarantee in this context to be around Rs 31,000 crore. The responsibility of formation of NARCL i.e. Bad Bank has been entrusted to IBA.

The proposed bad bank will give 15 per cent of the agreed value of the loan in cash while the remaining 85 per cent will be in the form of government guaranteed security receipt. Government guarantee will be encashed if there is loss on the prescribed price limit. According to sources, the proposal has been sent to the cabinet and security receipts to be issued by NARCL would require a government guarantee.

He said the cabinet is expected to approve the proposal soon. This will clear the way for the bad bank to come into operation. Finance Minister Nirmala Sitharaman had announced the formation of bad banks in the budget of 2021-22. Last year, the IBA had proposed the creation of a bad bank for speedy resolution of non-performing assets (NPAs). The government accepted the proposal and decided to adopt the Asset Reconstruction Company and Asset Management Company model in this regard.

Meanwhile, state-owned Canara Bank has expressed its intention to become the main sponsor of NARCL with a 12 per cent stake. Public sector banks will hold 51 per cent stake in the proposed NARCL while the rest will be with private sector banks.