The Indian government today announced a plan to provide guarantees of up to INR306bn ($4.1bn) for five years to the National Asset Reconstruction Company Ltd (NARCL) to help deal with overdue or 'sour' debt.
The government has approved a plan guaranteeing security receipts issued by NARCL that will not require any cash outflow from the exchequer.
“The government in the federal budget announced the intent to set up asset-management and asset-reconstruction companies to take over existing debt, manage and dispose of them to buyers to realise the value of the stressed assets,” finance minister Nirmala Sitharaman said today.
Under the plan, the banks will get 15% as cash from NARCL and 85% as security receipts.
Through the NARCL the government intends to resolve soured loans above INR5bn value up to a total of INR2trn. Initially, fully provisioned assets of about INR900bn are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred at a later stage.
The finance minister said banks have recovered INR5trn of unpaid loans in the last six years. Of this, INR3.1trn has been recovered since March 2018.
"Since the banks will remove these non-performing assets from their balance sheets, they can focus on lending activities that can help trigger a fresh round of credit off-take that the economy badly needs,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.