Bad bank guarantee: Finmin to seek Cabinet nod for Rs 31,000 cr-plan

The finance ministry could soon seek Cabinet approval for a plan to offer sovereign guarantee to the proposed bad bank, which is estimated to cost the government Rs 30,600 crore over five years.

“The proposal could be placed before the Cabinet for clearance very soon,” said a source. The government will offer guarantee on the security receipts (SRs) issued by the National Asset Reconstruction Company (NARCL) while acquiring bad loans from lenders.

The IBA, which has pegged the cost of government guarantee at `30,600 crore, is working out the details and NARCL would be operationalised soon.

A top banker had last week told FE that the cost to the exchequer won’t exceed this amount, as the prospects of recovery from some of the bad loans look promising.

Although the government backed the setting up of NARCL, it wouldn’t infuse capital into it; instead, participating banks would put in the equity. Nevertheless, it is set to give guarantee on the SRs, which will make the resolution process more viable and attractive.

Earlier, financial services secretary Debasish Panda had said banks would have the option to transfer several large stressed assets (of at least Rs 500 crore each) worth Rs 2.25 lakh crore to NARCL initially. The IBA is also working out an “exit strategy” for those accounts that remain unresolved even after five years.

ARCL is expected to acquire stressed assets at net book value by offering 15% of it upfront (in cash), and the rest (85%) in SRs.

Once the bad loan is resolved, realisation for the relevant bank would be in sync with its SR interest in that asset.
Of the 101 non-performing assets (NPAs) initially reviewed, banks have zeroed in on 22 accounts amounting to roughly Rs 89,000 crore for transfer to NARCL in the first phase.