BAD BANK - RBI grants licence to NARCL to begin functioning

The Bad Bank has now started working, and may help relieve Indian banking from its load of NPAs.

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• The story: In a first, the Reserve Bank of India (RBI) granted the licence to the Rs 6,000 crore National Asset Reconstruction Company Ltd. (NARCL). This is India's first "bad bank".
• Details: This will help in starting operations of the bad bank. The NARCL was incorporated in Mumbai in July 2021 after registration with the Registrar of Companies (RoC). IBA (Indian Banks Association) has been entrusted with the task to set up the bad bank.
• Where it emerged: The Finance Minister Nirmala Sitharaman in Budget 2021-22 had noted that a high level of provisioning of the stressed assets by public sector banks calls to initiate measures to clean up bank books. In that light, she announced to set up as “Asset Reconstruction Company Limited” and “Asset Management Company” to consolidate and take over existing stressed debt. Both was to set up for managing and disposing assets to alternative investment funds.

1. The Cabinet cleared a proposal to provide government guarantee of worth Rs 30,600 crore for security receipts issued by NARCL. NARCL will pay 15% of the agreed value for bad loans in cash while the remaining 85% will be government-guaranteed security receipts. 51% of the value will be owned by PSBs while remaining by private sector lenders.
2. Stake in NARCL - The SBI, Indian Bank and Union Bank of India picked up 13.27% stake each in the NARCL. Punjab National Bank also acquired about 12% stake.

• NARCL: The NARCL is the proposed bad bank to take over stressed assets of lenders. Government had planned to create a bad bank to house bad loans of Rs. 500 crore and above. It also comprises of an asset reconstruction company (ARC) and an asset management company (AMC) for managing and recovering assets. It was created in collaboration with public and private sector banks. The hope is that it will free the banks' management from the task of managing NPAs, allowing them to focus more on credit creation.
• EXAM QUESTIONS: (1) Explain the scope and functioning of a Bad Bank. (2) Why does India have such huge NPAs? Explain. (3) What is the moral hazard in running a Bad Bank? Explain.

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