Banks are known to give out loans, and these are not just for individuals but businesses as well. These businesses are sometimes humongous and do require a ton of funds. However, more often than not, they are not able to repay their debts. That’s where the NARCL comes in.
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Created in July 2021, the National Asset Reconstruction Construction Company Limited aims to take on these bad loans and sell them to buyers of distressed loans. In other words, this organisation is a bad bank that also sells off Non-Performing Assets (NPAs). In this article, we will understand how the NARCL takes over bad loans and this benefits banks. Additionally, we will also discuss the IDRCL (India Debt Resolution Company Limited).
What is the NARCL?
As stated, the Government of India started the National Asset Reconstruction Company in July 2021 under the leadership of our Finance Minister. It has been made a part of the Companies Act. It has also applied for the licence of an Asset Reconstruction Company under the Reserve Bank of India (RBI).
Read: Home Loan for Women in India – Interest Rates and Benefits
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The main purpose behind the formation of the NARCL is to acquire bad loans from banks and sell them to buyers who are looking for Non-Performing Assets (NPAs). The organisation itself will also decide the price of these NPAs. The bad bank will also provide regular banks with government receipts after taking over bad loans.
How does the NARCL Acquire Bad Loans?
During Phase I, the asset reconstruction company has been tasked with picking up bad loans worth 2 lakh crores. However, the initial capacity of the bad bank is valued at 6000 crores.
The company will identify and pick up bad loans from commercial banks. To do this, the organisation will pay 15% of the value of the bad loan in cash, and the remaining 85% will be paid via security receipts. According to the bill passed in September 2016, the government can guarantee security receipts worth 30,600 crores.
This guarantee is needed to ensure credibility and cover the differential value between the NPA’s face value and selling price. The sale will be carried out by a Swiss Challenge method in which the highest bidding ARC will get the asset.
The NARCL and IDRCL
The NARCL and IDRCL were created to solve commercial banks’ pain points. The IDRCL comes into play after the asset reconstruction company has acquired the bad loan. The IDRCL is responsible for managing the assets and using the expertise of market professionals to sell them. It is the IDRCL that will put a value on the NPA.
Public Sector Banks (PSBs) and Financial Institutions (FIs) will have a 49% share in the IDRCL. At the same time, Private Lenders (PIs) will own the entity’s bulk (51%).
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What is the Need for the NARCL and IDRCL?
Although India has many other Asset Reconstruction Companies, the need for a centralised organisation was needed. This is because the other smaller ARCs are unable to acquire huge loans as their thresholds are quite low. However, there are other methods of resolving bad debts-bankruptcy and insolvency- the centralised asset reconstruction company can find better value by repurposing these loans.
How will the NARCL and IDRCL Work?
The creation of the National Asset Reconstruction Company Limited (NARCL) and the India Debt Resolution Company Limited (IDRCL) is a significant development in the Indian financial landscape. These entities aim to address the mounting problem of bad loans and non-performing assets (NPAs) in the banking sector. Here’s a breakdown of how NARCL and IDRCL will function:
Formation and Structure:
- NARCL, also known as the “bad bank,” is a public-private partnership (PPP) initiated by the Government of India and major banks.
- IDRCL is a fully-owned subsidiary of NARCL.
- NARCL will acquire NPAs from banks at a negotiated value, transferring them to its books.
- IDRCL will act as the operational unit responsible for the resolution and recovery of these NPAs.
Asset Acquisition:
- NARCL will acquire stressed assets from banks using a combination of cash and security receipts.
- The acquisition price will be determined based on the asset quality and the projected recovery potential.
- This process will provide immediate relief to banks, allowing them to clean up their balance sheets and focus on lending.
Resolution and Recovery:
- IDRCL will undertake the task of resolving the acquired NPAs through various strategies, including restructuring, asset sale, and turnaround management.
- The emphasis will be on maximizing the value of these assets and recovering dues.
- IDRCL will collaborate with industry experts, professionals, and specialized agencies to ensure effective resolution.
Funding and Governance:
- NARCL will raise funds through a mix of equity, debt, and guarantees from participating banks and other financial institutions.
- The governance structure will comprise representatives from banks, professionals, and the government.
- The functioning of NARCL and IDRCL will be regulated by the Reserve Bank of India (RBI) guidelines for asset reconstruction companies.
How Does the NARCL Help Banks?
Even though the asset reconstruction company list runs long, Indian banks realised the need for a more powerful entity long ago. With the number of Non-Performing Assets rising each day, Public Sector Banks and Financial Institutions were almost helpless in resolving large-value bad loans.
If you are asking what is bad loan? Then, you should know that any loan for which the bank has not received interest for over 90 days is considered a bad loan or a Non-Performing Asset. However, as stated, the centralised asset reconstruction company only picks up bad loans that are worth more than a certain amount. So, let’s see how this company, along with the IDRCL, benefits banks.
- Rewards for quick resolution: Banks are rewarded for identifying and notifying the company about bad loans.
- Superior Value Realisation: Banks benefit a lot more when an NPA is repurposed rather than declaring it bankrupt or insolvent.
- Increases Efficiency: Once the asset reconstruction company steps in, the employees of the bank are free to focus on increasing business and dealing with new customers.
- Better Valuation: By selling off the NPAs, banks greatly raise their valuation.
- Market capital raising capability: Once banks are free of bad loans, they can better raise capital from the market.
How is NARCL different from other asset reconstruction companies?
NARCL stands out from other asset reconstruction companies (ARCs) in several ways, bringing a fresh approach to tackling the NPA problem in India:
Scale and Scope:
- NARCL is envisioned as a mega-ARC, aiming to acquire a large volume of stressed assets from banks.
- The scale of its operations will enable a more significant impact and contribute to the overall cleanup of the banking sector.
Public-Private Partnership:
- NARCL is a unique collaboration between the government and banks, harnessing their collective strengths and expertise.
- This partnership ensures a shared responsibility and commitment towards resolving the NPA issue effectively.
Expertise and Specialization:
- IDRCL, as a subsidiary of NARCL, will focus solely on the resolution and recovery of NPAs.
- The specialized nature of IDRCL’s operations allows for dedicated attention and expertise in dealing with stressed assets.
Enhanced Recovery Mechanisms:
- NARCL and IDRCL will leverage innovative strategies and best practices to enhance recovery rates.
- The utilization of professional expertise and industry partnerships will facilitate more effective resolution and better value realization.
The need for a bad bank arose due to many non-performing assets or bad loans. These bad loans are a result of bad credibility judgement. Credit underwriting is a very important task in determining a borrower’s creditworthiness. If not done correctly, these loans often become a liability more than an asset. Therefore, to better help the asset reconstruction company, banks should improve their credit underwriting procedure.
We have discussed how the NARCL and IDRCL together assist banks in repurposing bad loans and also explored the reasons as to why Public Sector Banks and Financial Institutions needed these entities. Additionally, we also learnt about how banks benefit once these entities come into play. For more informative articles like this on various topics like law, finance, real estate, interior decor, lifestyle, etc., log onto NoBroker Times.
FAQ’s
Q1: Why were the NARCL and IDRCL created even though India already has 28 other Asset Reconstruction Companies (ARCs)?
A1: Smaller asset reconstruction companies are only capable of resolving bad loans that are worth smaller amounts. In contrast, the National Asset Reconstruction Company can identify and repurpose loans worth much more.
Q2: How do the NARCL and IDRCL work?
A2: First, the NARCL identifies a bad loan and makes an offer to the bank. The payment is made in 15% cash and 85% security receipts. Once acquired, the IDRCL evaluates and comes up with a suitable value, then sells it to the highest bidder.
Q3: Which loans are taken over by the NARCL?
A3: In Phase I, the NARCL is looking to take over bad loans worth 500 crores or more each. In this stage, the NARCL will be given bad loans totalling up to 90,000 crores.
Q4: Has the NARCL taken over any loans since its inception?
A4: The NARCL is all set to take up its first bad loan from lenders in Maharashtra. The Jaypee Infratech loans are worth 9,234 crores, and the NARCL has bid on it with a price of 3,570 crores. This ensures a 40% recovery made by the lenders.
Q5: How do banks benefit from the operations of the NARCL?
A5: The NARCL buys off bad loans from Public Sector Banks and Financial Institutions for a handsome amount. This amount helps the lenders recover some of the value lent out. This helps the bank’s valuation and ability to raise market capital.
