Sitharaman announces Rs 30,600 cr govt guarantee for 'bad bank'

New Delhi: In a bid to address the problem of Non-Performing Assets (NPAs) resulting in bad loans in public sector banks, Union Finance minister Nirmala Sitharaman on Thursday said that the Cabinet cleared the formation of the country's first-ever 'bad bank'.

The minister announced a government guarantee of up to Rs 30,600 crore for security receipts issued by the National Asset Reconstruction Company Ltd (NARCL) as part of the resolution of bad loans.

"The Cabinet has yesterday approved Central Government guarantee up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company Limited (NARCL)," she said.

Sitharaman added that Budget 2021 had announced the government's intention to set up an Asset Reconstruction Company (ARC) along with Asset Management Company to consolidate and take over existing stressed debt and thereafter manage and dispose them off to buyers for value realisation.

Addressing the media, she said that banks' asset quality review had happened in 2015, for cleaning up and fully provisioning bank balance sheets, this revealed a very high incidence of NPAs, and added that the government came up with a four-R strategy of Recognition, Resolution, Recapitalisation and Reforms.

After recognition, quantification of NPAs started in a planned manner and recovery too started, Sitharaman said adding that in the last six financial years, the 4Rs were executed meticulously, banks have recovered Rs 5,01,479 crore.

Out of Rs 5,01,479 Crore recovered by banks during the last six years, Rs 3.1 lakh crore has been recovered since March 2018, the finance minister said adding that a record Rs 1.2 lakh crore has been recovered in 2018-19 alone.

Out of the amount of Rs 5,01,479 lakh crore recovered by banks during the last six years, Rs 99,996 crore comprises the amount recovered from written-off assets, she said.

Speaking about the recent banking reforms introduced over the past few years, Sitharaman spoke of the managerial reforms, bringing of cooperative banks under the Reserve Bank of India (RBI), a supervisory framework for primary co-op banks, Bank Board Bureau, ARCs, strengthening risk management practices and debarring of willful defaulters from capital markets.

Explaining one of the reasons for the level of NPAs, Sitharaman said that large frauds of Rs 100 crore or more have an average lag time of 57 months for fraud detection.

Speaking of the health of the public sector lenders, the Finance minister said that in 2018, just two of the 21 public sector banks (PSBs) were profitable and added "I am happy to say that in 2020-21, only 2 reported loss for the year."

She further said PSBs are now not only making profits, but they are also raising money from the markets, a total of Rs 58,697 crore has been raised by PSBs as debt and equity.

Sitharaman maintained that NARCL will aggregate the NPAs in banks' balance sheets (for which full provisioning has been done) and manage and dispose of them professionally, this will thus clean up banks' balance sheets.