Proposal to provide government guarantee for security receipts approved by the Union Cabinet

A proposal to provide government guarantee worth US$ 4.16 billion for security receipts was cleared by the Union Finance Minister Smt. Nirmala Sitharaman on September 16, 2021. The security receipts are issued by the National Asset Reconstruction Company (NARCL) for the resolution of bad loans. The FM made the announcement at a press conference held in New Delhi. FM announced that the NPAs in banks’ balance sheets (provided with full provisioning) will be aggregated by the NARCL, in addition to managing and disposing them professionally and cleaning their balance sheets, accordingly.

The Indian Banks’ Association (IBA) had forwarded an application to the RBI last  month for the approval of a licence to establish a US$ 816 million NARCL. With the cabinet’s approval, the sovereign guarantee will be extended to security receipts issued by the NARCL and the  proposed Bad Bank will become operational. The creation of the NARCL had been announced in the FM’s Budget Speech for 2021-22.

Upto 15 percent of the agreed value for the loans will be paid by the proposed Bad Bank or NARCL in cash, while the remaining 85 percent will be settled as government-guaranteed security receipts,  in case of losses against the threshold value. Under the NARCL, the guarantee will be valid for five years and public sector banks (PSBs) will have a 51 percent ownership. The FM   also announced that the centre, in collaboration with NARCL,  will be establishing an India Debt Resolution firm and assured that the GOI and the RBI were taking various measures to improve the banking sector. The FM also highlighted  that the PSBs were raising funds through equity and debt markets, with only 2 out of 21 PSBs reporting a loss through 2020-21. Further, in the last six consecutive fiscal years, the  4 Rs– Recognition, Resolution, Recapitalisation and Reforms, were undertaken systematically and banks had managed to recover US$ 68 billion.