The government announced a new structure to profit off what’s broken at India’s commercial banks. The proposed National Asset Reconstruction Company Ltd (NARCL) will acquire Rs 2 lakh crore worth toxic loans from banks paying 15% cash up front, followed by 85% sovereign-backed tradable security receipts. The entire Rs 2 lakh crore worth NPAs belong to some 30-40 large defaulters, with each owing in excess of Rs 500 crore. In phase one, Rs 90,000 crore worth sour assets that banks had written off will be absorbed. Initial estimates peg recoverable amount at 30-40%, which means that if the NARCL’s valuation suits banks, they get upfront payment that can boost profitability and capital position within this fiscal. However, there won’t be any decline in gross NPAs as they are already written off.
The move comes after the RBI’s humble attempt in 2017 to resolve 40 large NPAs in a timebound manner, courtesy the freshly minted bankruptcy law. Five years after the insolvency proceedings, it’s evident that resolution is anything but smooth thanks to legal hurdles. Moreover, recoveries weren’t really handsome, barring a few isolated cases. Now, the government is giving it another shot, allowing itself ample time—five years—for resolution or recovery. The one distinguishing factor between all the existing resolution routes and the proposed NARCL is that it’s a much faster way for banks to get rid of stressed assets without fretting over the resolution or liquidation process and instead focus on core banking.
In essence, the NARCL allows swift ownership change of NPAs, but much like other mechanisms, the new game in town lacks the one thing that’s needed—tackling bargain-hunting buyers. Banks are stuck with stressed assets not because they are all worthless, but because prospective buyers are looking for cut-price deals or promoters are blocking the way, moving courts and stalling resolutions, offering last minute payouts. Whether it’s banks or the new asset reconstruction company, success squarely depends on the market appetite and valuing the asset just right.