NATIONAL ASSET RECONSTRUCTION COMPANY LTD (NARCL)

NATIONAL ASSET RECONSTRUCTION COMPANY LTD (NARCL)

Subject: Economy

Context: Banks in India have identified about 22 bad loans worth ₹89,000 crore to be transferred to the National Asset Reconstruction Company Ltd. (NARCL) in the initial phase.

Concept:

• Setting up of NARCL, the proposed bad bank for taking over stressed assets of lenders, was announced in the Budget for 2021-22.
• The plan is to create a bad bank to house bad loans of ₹500 crore and above, in a structure that will contain an asset reconstruction company (ARC) and an asset management company (AMC) to manage and recover dud assets.
• The new entity is being created in collaboration with both public and private sector banks.

How is NARCL different from existing ARCs? How can it operate differently?

• The proposed bad bank will have a public sector character since the idea is mooted by the government and majority ownership is likely to rest with state-owned banks.
• At present, ARCs typically seek a steep discount on loans. With the proposed bad bank being set up, the valuation issue is unlikely to come up since this is a government initiative.
• The government-backed ARC will have deep pockets to buy out big accounts and thus free up banks from carrying these accounts on their books.

Asset Reconstruction Company (ARC)

• It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities.
• The asset reconstruction companies or ARCs are registered under the RBI.
• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.