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FM Nirmala Sitharaman announces Rs 30,600 cr govt guarantee for Bad Bank

10:24 PM Sep 16, 2021 | FPJ Web Desk

Finance Minister Nirmala Sitharaman announced the setting up of National Asset Reconstruction Company Ltd (NARCL) or bad bank. The Rs 30,600 crore will be only for a period of five years, Sitharaman said.

In a press conference on September 16, the FM said there would be an average lag time of 57 months in the detection of large bad loans.

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"It will therefore result in bank balance sheet and books cleaner, transparent," Sitharaman said.

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"In totality, we have addressed issues in the banking sector that were staring us in the face in 2015," the finance minister said.

The Union Cabinet has cleared a proposal to provide Rs 30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans, Finance Minister Nirmala Sitharaman said on Thursday.

The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.

Government guarantees will be valid for up to five years. This will ensure a timely resolution of assets, the finance minister said.

The government guarantee would be invoked if there is loss against the threshold value. Guarantees can only be invoked in case of resolution or liquidation of bad loans, Sitharaman said.

Rs 2 lakh crore worth NPA will be sent to the NARCL, of this Rs 90,000 crore will be transferred in the first phase.

The Finance Minister said that the RBI has taken various steps to reform the banking sector.

"In 2018, only two public sector banks out of the 21 were profitable. In 2020-21, only two public sector lenders reported a loss for the full year," Finance Minister said today.

"Since 2014, they have been creating the bank board bureau, creating a framework of key performance indicators, and planned mergers are some of the reforms done for the improvement for the banking sector, the Finance Minister said.

Government guarantees will be valid for up to five years. This will ensure a timely resolution of assets, the finance minister said.

Financial Services Secretary Debashis Panda said, "NARCL has been incorporated as a company. The license is in the process by RBI and the cabinet approval will also come in due time. Assets to be transferred have also been identified."

Sitharaman said, "One of the reasons for the NPAs is because banks personnel do not have adequate specialisation in NPA disposal. Bank professionals, however good they are, cannot deal with asset rexonstruction. So the banks will now feel that it is no longer their headache and free to do their core competent jobs," she said.

Setting up of bad bank announced in 2021-22 Budget

The Finance Minister Nirmala Sitharaman had first announced the setting up of a ‘bad bank’ in her 2021-22 Union Budget.

The National Asset Reconstruction Company Ltd (NARCL), as the bad bank will be known, could get the government’s guarantee on security receipts that it will use to purchase bad loans from banks.

The Indian Banks' Association (IBA) had moved an application to the Reserve Bank of India (RBI) seeking licence to set up a Rs 6,000 crore National Asset Reconstruction Company Ltd (NARCL) or bad bank, according to sources, PTI said.

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