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Transferring Sticky Loans: Fully Provided NPAs may go to proposed bad bank

Posted Date: 28-05-2021 Posted By: user

The Indian government looks determined to do every possible move to the complete cleanup exercise so that npa in india comes under control.

In an important decision, the government declares to transfer corporate loans worth more than 1.5 Lakh crore to the ARC (Asset Reconstruction Company). This new entity is planned for NPA management and control.

The recent pandemic situation has added fuel to the fire. Experts say that there has been a big surge in the NPA figures, but they are still not known. It is because the true level of damage caused by Covid 19 is still not calculated.

Ballpark figures say that there are NPAs worth more than 2.5 Lakh Crore in 70 large accounts that banks do not have any power to recover. It is quite a large sum.

According to npa account settlement experts, all of them are not stressed assets. With the help of the ARC-AMC model, it will be possible to aggregate these assets from various banks and convert them into one entity.

Thus, experts can maximize its value in a market-led manner. The basis of the asset transfer will be the net book value.

IBA asks lenders to give data In another move, the Indian Bank’s Association or IBA has asked lenders to give data related to stressed accounts with

principal outstanding amounts more than 500 crores. It will help in measuring the total capital requirement to run the proposed bad bank.

Both IBA and the Department of Financial Services are working jointly to design the structure of ARC. Since the objective of creating ARC is to extract the money stuck in the secure loans. Thus, banks can focus on their fundamental work of credit management.

The work of npa account settlement, thus, becomes structured.

The process of buying loans by ARC has been formulated. It is said that the ARC will offer 15 percent of the loans in cash. The remaining 85 percent will be in the form of security receipts against bad debts. The banks will get a return in line with the recovered amount.

There will be no direct support by the central government to the ARC, but it will offer a sovereign guarantees to meet the regulatory requirement.

Figures say that the overall gross NPA ratio will increase. The time will prove that the steps being taken by the government to control npa in india will give some result or not.