Question: Highlight salient features of National Asset Reconstruction Company Ltd (NARCL). Explain its role in strengthening banking structure in India.
Answer: The NARCL along with Indian Debt Resolution Company Ltd (IDRCL) make up the ‘Bad Bank’. A bad bank is a financial entity that is set up for a specific purpose of resolving stressed assets of commercial banks.
The NARCL is a company that is set up under the SARFAESI Act, 2002. The act applies to only secured loans of commercial banks and Cooperative banks.
- Buying stressed assets
The NARCL will identify stressed assets of commercial banks and buy them by paying 15% cost as upfront fee. The remaining will be paid after selling of the asset. The IDRCL will manage the stressed assets.
- Government guarantee
The central government has outlined a fund for financing deficits of NARCL. If NARCL fails to sell asset at actual prize, the difference will be paid by the government from its earmarked fund.
Role of NARCL in strengthening banking structure
- Separate stressed assets from capital
NARCL will separate stressed assets of banks from its capital so that banks can have a clean sheet. This will improve banks’ balance sheet.
- Addition of capital
The capital received after selling stressed assets will be used for strengthening its finances. It will enable banks to improve their business.
- Short term solution
The setting up of NARCL will only provide short-term relief from existing stressed assets. There is a need to improve lending habits to prevent such problems in future.
- Public funding
It is unlikely to sell assets for the earmarked rice and the deficit has to be financed from government coffers out of taxpayers’ money.
Thus, NARCL will provide some sort of relief to stressed banking sector in India. However, structural changes are the need of the hour.