Potential impacts of national asset Reconstruction company limited (bad bank)

Abstract

Restructuring of loans, opertionalisation of bad banks along with overhauling insolvency and resolution frameworks are some of the global policy solutions to address the overhang of non- performing assets (NPAs). However, it is the operationalization of bad banks that is still among the most well-liked notions, especially when dealing with system-wide stressed assets, even though these alternative methods have stood the test of time in various nations. To put it in simple terms, any structure, that allows for the isolation or segregation of non performing assets (NPAs) from the performing assets, either on the balance sheet or off it, is referred to as a "bad bank." Increased transparency and mechanism for market signaling are two benefits of on-balance sheet models, which isolate the NPAs into separate internal entities and thereby highlighting the undertaking of the banks to clean up their loan books. On the other hand, off-balance sheet models can take the form of a special purpose vehicle (SPV) that assumes ownership of the NPAs or stressed assets are then bundled, securitised & offloaded to investors interested in buying them. An alternative is to transfer the problematic assets to an asset management company (AMC) or asset reconstruction company (ARC). In contrast to the other models, the latter one guarantees the greatest risk transfer despite being complex and expensive. Both excitement and skepticism have been expressed in equal measure in response to the formation of the Indian bad bank i.e., the National Asset Reconstruction Company Limited (NARCL) and the government's subsequent declaration to guarantee INR 30,600 crore, to be utilized for its security receipts (SRs). While some have praised this breakthrough as a cure- all, less optimistic experts have pointed their fingers at the prior existence of the various routes of resolving the distressed assets and the difficulties they face. The NARCL has been officially registered, led by the Indian Banks Association (IBA), via which twelve public sector banks and four private lenders have agreed to invest. The NARCL has been tasked with cleaning up all the banks' stressed assets. It is to take over the bad loans at approximately 15% of their value and issue SRs for the rest 85%, for which payment will be made post-resolution based on the realisation amount.