GS Paper - 3 (Economy)

Finance Minister Nirmala Sitharaman on 16 September 2021 announced a formal government guarantee on the securities receipts that the planned ‘bad bank’ will issue to banks as it takes on non-performing assets from their books. The government guarantee will be Rs 30,600 crore.

What

  1. The Union Cabinet on 15 September 2021 cleared a proposal to provide government guarantee to security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans, Sitharaman said.
  2. NARCL proposes to acquire stressed assets of about Rs 2 trillion in phases within extant regulations of RBI.
  3. 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.
  4. Substantial amounts 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.
  5. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.
  6. The Finance Minister in Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.
  7. The guarantee will be valid for 5 years. 15% cash payment will be made to banks for NPAs based on some valuation, 85% will be given as Security Receipts.
  8. 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.