Bad Bank: Government Guarantee costs Rs 30,600 crore


The government will not inject capital into the proposed company, but the banks will; However, the government expected to provide a guarantee for security receipts issued by the facility

The Indian Banks’ Association (IBA) has estimated that the government may have to shell out no more than Rs 30,600 crore if it provides a guarantee on Security Receipts (SRs) issued by the National Asset Reconstruction Company (NARCL) while they are in default Loans acquire lenders, a top banker told FE.

“Prospects for repayment of some non-performing loans look promising. Therefore, the state guarantee for SRs, subject to approval, may not cost more than this amount. Details are being worked out by the IBA and NARCL will be operational soon,” he said.

Although the government supported the creation of NARCL, it was unwilling to inject capital into it; instead, participating banks would contribute the equity. Still, bankers expect the government to provide a guarantee for the SRs, making the resolution process more viable and attractive.

Earlier, Finance Services Minister Debasish Panda had said banks would have the option to transfer several large stressed assets (of at least Rs 500 crore each) to NARCL initially worth Rs 225 crore.

The IBA, which is leading efforts to set up NARCL, has focused on five consultants to speed up the process. It has solicited offers from SBI Capital Markets and Oliver Wyman for advisory services; from E&Y for tax advice; AZB & Partner for legal advice; and AON Consulting for human resource services.

NARCL is expected to acquire strained assets at net book value, offering 15% of them upfront (in cash) and the remainder (85%) in SRs. Once the non-performing loan is resolved, the recovery for that bank would be consistent with its SR interest in that asset.

The IBA is also developing an “exit strategy” for those accounts that are still unresolved after five years, said the banker.

Of the 101 non-performing assets (NPAs) initially reviewed, the banks have focused on 22 accounts of approximately Rs 89,000 for transfer to NARCL in the first phase.

The IBA has already formed a core committee chaired by its Chairman (Managing Director of Union Bank of India Rajkiran Rai) to establish NARCL and Indian Asset Management Company. The committee also includes IBA Managing Director Sunil Mehta, State Bank of India MD J Swaminathan, IDBI Bank MD and CEO Rakesh Sharma and ICICI Bank Executive Director Sandeep Batra.

The proposed asset management company, composed of professionals, will be set up within the broader NARCL structure, which will map out the toxic assets and make appropriate decisions, including selling them to investors.

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