FM Nirmala Sitharaman press conference: Centre to set up National Asset Reconstruction Company
The National Asset Reconstruction Company Limited (NAARCL) will aggregate NPAs in banks' balance sheets and manage and dispose of them professionally, this will thus clean up banks' balance sheets.
Union Finance Minister Nirmala Sitharaman addressed the media on September 16, 2021 regarding a cabinet decision that had been taken a day earlier, when the Union Cabinet had approved Central Government guarantee up to Rs 30,600 crores to back Security Receipts to be issued by National Asset Reconstruction Company Limited.
The Finance Minister spoke mainly about setting up of an asset reconstruction and asset management company. She referred to Budget 2021 during which the government had announced its intention to set up an Asset Reconstruction Company (ARC) along with Asset Management Company to consolidate and take over existing stressed debt and thereafter manage and dispose them off to buyers for value realization.
FM Nirmala Sitharaman press conference: Key Announcements
Centre to set up following two companies:
i) Asset Reconstruction Company: The National Asset Reconstruction Company Limited (NAARCL) will aggregate NPAs in banks' balance sheets (for which full provisioning has been done) and manage and dispose of them professionally, this will thus clean up banks' balance sheets. The Public sector banks and financial institutions can hold up to 51% ownership in NARCL.
ii) India Debt Resolution Company Limited: Public sector banks, institutions will hold a maximum of 49 percent stake in India Debt Resolution Company Limited and remaining will be open for the private sector.
The Union Finance Minister informed that 15 percent cash payment will be made to banks for NPAs based on some valuation, 85 percent will be given as Security Receipts. Further for Security Receipts to have their value intact, government will have to give a backstop arrangement, hence the govt guarantee of Rs. 30,600cr has been cleared by the Union Cabinet.
15% cash payment will be made to banks for NPAs based on some valuation, 85% will be given as Security Receipts. For Security Receipts to have their value intact, Govt has to give a backstop arrangement, hence the govt guarantee of Rs. 30,600cr cleared by Union Cabinet: FM— ANI (@ANI) September 16, 2021
Centre's 4R strategy - Recognition, Resolution, Recapitalisation and Reforms.
FM Nirmala Sitharaman informed that a banks' asset quality review had taken place in 2015 for cleaning up and fully provisioning bank balance sheets, which revealed a high incidence of Non-Performing Assets (NPAs). The centre then came up with 4R strategy of Recognition, Resolution, Recapitalisation and Reforms.
In last six financial years, the govt's 4Rs strategy-Recognition, Resolution, Recapitalisation and Reforms- was executed, after this banks have recovered Rs 5,01,479 crores: Finance Minister Nirmala Sitharaman pic.twitter.com/0QTCsOivGW— ANI (@ANI) September 16, 2021
•The banks have recovered a total of Rs 5,01,479 crores in last 6 years, out of which Rs 3.1 Lakh Crore has been recovered since March 2018. The FM announced that in 2018-19 alone, a record Rs. 1.2 lakh crore has been recovered.
Out of the total Rs 5,01,479 crore recovered by banks during last 6 years, Rs 99,996 crore comprises amount recovered from written off assets
•In 2017-18, Government infused 90,000 crores and 1.06 lakh crores in 2018-19 and 70,000 crores in 19-20 and 20,000 crores in 20-21 and 20,000 crores proposed for current fiscal years 21-22.
•In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses.
-Bringing cooperative banks under RBI
-Several supervisory framework for primary cooperative banks
-Creating Bank Board Bureau
-Strengthening of risk management practices
-Willful defaulters debarred from accessing capital market
-Six new DRTs have been established to enable faster recovery
-Large frauds of 100 crores or more with average lag time of 57 months were detected
-Fraud detection and prevention was undertaken
-Fugitive Economic Offenders Act of 2018 has also showed a lot of results
The Finance Minister informed that Public Sector Banks are now not only making profits but they are also raising money from the markets. Overall, a total of Rs 58,697 Crore has been raised by PSBs as debt and equity.
Union Finance Minister Nirmala Sitharaman had announced the proposal to set up a bad bank during her Union Budget 2021-22 speech earlier this year. The bank is expected to comprise an asset management company (AMC) and asset reconstruction company (ARC).
The main role of the bad bank will be to consolidate and take over the stressed debt of banks. The government is expected to provide guarantees to support the bad bank.
What is a bad bank?
A bad bank is a special bank, an asset reconstruction programme, set up to house stressed or bad loans of other banks and tries to resolve such loans. The bank will enable other banks to focus on their core competencies.