Finance Minister Nirmala Sitharaman on Thursday announced a formal government guarantee on the security receipts that the planned bad bank would issue to banks as it takes on non-performing assets (NPAs) from their books. The government guarantee would be Rs 30,600 crore, she said. 

The Union Cabinet had on Wednesday cleared a proposal to provide government guarantee to security receipts issued by the National Asset Reconstruction Company (NARCL) as a part of resolution of bad loans, Ms Sitharaman said at a press briefing in New Delhi today. NARCL proposes to acquire stressed assets of about Rs 2,00,000 crore in phases within extant regulations of the RBI. NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. 

“Substantial amount of NPAs continue on balance sheets of banks, primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution,” said the Ministry of Finance on the rationale for setting up the bad bank. 

In the Union Budget 2021-22, the finance minister had announced that the high level of provisioning by public sector banks for their stressed assets called for measures to clean up the banks’ books. The guarantee would be valid for five years. “15 per cent cash payment will be made to banks for NPAs based on some valuation, 85 per cent will be given as security receipts. For security receipts to have their value intact, the government has to give a backstop arrangement, hence the government guarantee of Rs 30,600 crore cleared by Union Cabinet,” said Ms Sitharaman.