Economy Simplified: India’s first-ever “Bad Bank”: Government sets up ‘bad bank’ to clear the NPA mess.

1. The NARCL-IDRCL structure is the new bad bank.
2. “National Asset Reconstruction Company Limited” (NARCL) has already been incorporated under the Companies Act. It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases. 
3. Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.
4. Public sector banks will have a 51% ownership in the NARCL, while their shareholding along with that of public sector financial institutions will be capped at 49% for the IDRC, with private lenders bringing in the rest of the equity capital

‘Back-stop arrangement’

1. A 15% cash payment would be made to the banks based on some valuation and the rest will be given as security receipts. 
2. For those to hold on and have their value intact, there is a need for the government to give a back-stop arrangement and that is why this ₹30,600 crore has been cleared by the Cabinet. 
3. Once the NARCL and the IDRC have finally resolved the asset, the balance 85% held as security receipts would be given to the banks. 
4. The government back-stop will come in only as much as to pay the gap between the realised value and the face value of those receipts and this will hold good for only five years.


1. The government guarantee for the proposed security receipts is a positive stepping stone for unlocking stressed assets’ value.
2. The upfront cash payment by the NARCL to banks will immediately be accretive for the profitability and capital of the banks.
However the ability of the NARCL to resolve these assets in a time-bound manner will be critical for future provision writeback by banks.

Leave a Comment

Your email address will not be published. Required fields are marked *