Government guarantee for proposed bad bank may be capped at Rs 31,000 crore

The government guarantee for the proposed bad bank may be capped at Rs 31,000 crore as lenders have indicated higher-than-expected recoveries through the institution expected to become operational soon.

The government guarantee will cover all security receipts (SRs) issued by the new bad bank while acquiring non-performing assets (NPAs), said a senior executive aware of the deliberations.

"An upside in recovery has been projected by lenders and hence the invocation of the government guarantee may not be for its full face value," the executive noted, adding that the amount would be enough to cover all security receipts issued.

National Asset Reconstruction Co. Ltd (NARCL), being set up by various participating banks, is expected to be approved by the government soon. It will acquire NPAs or bad loans at net book value, paying 15% consideration in cash and the remaining 85% in security receipts. These instruments give the seller a right, title, or interest in the NPA acquired by an ARC. When the NPA is resolved, the bank gets a payment based on its SR interest in that asset. The government has said it will guarantee these receipts, a support that's expected to encourage the sale and resolution of NPAs.

"We are also working out an exit strategy for the unresolved accounts at the end of five years," said the executive cited above.

In the first phase, banks have identified 22 bad loan accounts aggregating about Rs 89,000 crore that will be transferred to NARCL. Padmakumar Nair of State Bank of India has already been deputed as its CEO.


NARCL can only take up stressed assets worth Rs 500 crore or more for resolution. There are about Rs 3 lakh crore of bad loans that meet this condition.

The Indian Banks' Association (IBA) has also set up a five-member core committee under Union Bank of India managing director Rajkiran Rai for establishing NARCL and Indian Asset Management Co. Ltd (IAMCL) as part of the exercise. The other members of the committee are IDBI Bank MD and CEO Rakesh Sharma, ICICI Bank executive director Sandeep Batra, State Bank of India managing director J Swaminathan and IBA chief executive Sunil Mehta.