Padmakumar Madhavan Nair, Chief General Manager of Stressed Assets Resolution Group at State Bank of India(SBI) appointed as the 1st Chief Executive Officer(CEO) of the National Asset Reconstruction Company Ltd (NARCL). (At present, he will be joining the company on deputation basis)
- NARC (the name coined for the bad bank) is expected to be operational in June,2021. It will be created in collaboration with both public and private sector banks.
Note – Bad bank refers to a financial institution that takes over bad loans of lenders and undertakes resolution.
Background:
In the budget for 2021-22, Finance Minister Nirmala Sitharaman announced the set-up of an Asset Reconstruction Company (ARC)/bad bank to consolidate and take over existing stressed assets of lenders and undertake their resolution.
Key points:
i.In consultation with the Finance Ministry and the Reserve Bank of India, the Indian Banks’ Association (IBA) is spearheading the formation of NARCL.
ii.Stressed assets with principal outstanding of Rs 500 crore and above, aggregating about Rs 1.50 lakh crore, are expected to be transferred to NARCL.
iii.Based on the annual report of Reserve Bank of India (RBI), about 1.9 lakh crore of loans have been classified as fraud as on March 2020.
iv.The Financial Stability Report of RBI projected the NPAs of the banking sector to increase to 13.5 percent of advances by September 2021, from 7.5 per cent in September 2020.
About Asset Reconstruction Company(ARC):
i.It is a financial institution (FI) that buys the NPAs (Non-Performing Assets) or bad loans from banks and FI and helps them to recover from the NPAs.
ii.They are registered under RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002.
iii.Capital needs: The net owned funds of ARCs should be Rs 100 crore or more and they also have to maintain a capital adequacy ratio of 15 percent of its risk-weighted assets.
iv.ARC will have an Asset Management Company (AMC) to manage and sell bad assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation.
v.ARC will pay banks 15 percent as cash and 85 percent as Security Receipts (SR) against bad debt that will be sold to the ARC.
Recent Related News:
In April 2021, The Reserve Bank of India (RBI) set up a 6-member committee to evaluate the role of Asset Reconstruction Companies (ARCs) in stressed debt resolution and review their business model. The committee will be headed by Sudarshan Sen, former executive director, RBI.
