National Asset Reconstruction Company Limited

National Asset Reconstruction Company Ltd (NARCL), introduced in July 2021, is a bad bank to dispose of the stressed assets of commercial banks. Stressed assets are a combination of Non-Performing Assets (NPAs), restructured loans, and written-off assets. Under the Companies Act, NARCL is established as an assets reconstruction company and has applied for a license as an Asset Reconstruction Company (ARC). The Cabinet approved the Rs 30,600 crore guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.

National Asset Reconstruction Company Ltd (NARCL)

NARCL is a type of Bad Bank implemented to resolve the problem of bad loans impacting the public sector banks. They take over the stressed assets of money lenders. It has a public sector character because the government proposes the project, and the majority ownership is with state-owned banks. Canara Bank is the primary sponsor of NARCL and will likely take a 12% equity stake in NARCL. NARCL also has equity participation by other nationalized banks, and Public Sector Banks (PSBs) have a 51% ownership of NARCL.

In the first phase of NARCL, stressed assets of commercial banks worth Rs 2 lakh crore have been identified to be taken up by the NARCL. NARCL will be starting with a total capital of Rs 6,000 crore. In October 2021, NARCL received the RBI’s license to commence operations as a ‘bad bank’. Banks will combine and consolidate stressed assets with NARCL for resolution. The Managing Director of NARCL is PM Nair, a stressed assets expert from the State Bank of India (SBI).

Even though there are other asset reconstruction companies (ARCs) for the resolution of stressed assets, NARCL is significant because the existing ARCs have been helpful only in the case of smaller value loans. The Union Budget 2020-21 announced the NARCL-IDRCL structure considering the large stock of legacy non-performing assets (NPAs). It has a government guarantee worth Rs 30,600 crore, which puts the minimum recovery rate at 18% from the acquired loans. While NARCL is the bad bank, IDRCL takes care of the resolution of bad assets. This structure is different from the present asset reconstruction enterprises, which do both bad debt aggregation and resolution.


India Debt Resolution Company Limited (IDRCL) is an operational service company that manages assets and engages professionals and turnaround experts in managing assets. Public Sector Banks and public FIs would hold a maximum of 49% stake in IDRCL, while 51% belong to private owners. IDRCL will manage stressed assets acquired by NARCL for price discovery and value addition.

NARCL acquires fully provisioned stressed assets by offering the lead bank in a consortium of lenders. Once received, it pays banks 15% cash upfront for these assets and issues “security receipts” for the remaining 85% of the asset value. Then, NARCL engages with (IDRCL) for management and resolution of the stressed assets. When the assets are sold, the banks will receive the rest. After completing, the balance of 85% of the value held as security receipts would be given to the banks.

If NARCL-IDRCL cannot sell the stressed assets or sell them at a loss, the government guarantee will be invoked. The difference is what the commercial bank was supposed to get and what they could be paid from the Rs 30,600 crore provided by the government. In a bid to disincentivize delay in resolution, the government has also suggested that the NARCL pay a guarantee fee to the Centre, which increases over time.

Benefits of NARCL

  • Faster Debt Consolidation: NARCL will help faster consolidate debts, leading to better recovery rates and quick decision making
  • Reduction in NPAs: After completing Phase-1, there will be a near-term NPA reduction of >1% and NPA recoveries equivalent to 10bps of system credit.
  • Increase productivity: It helps banking staff focus on more meaningful activities such as getting more business.
  • Repository for bad loans: The bad bank could help clean bank balance sheets without a successful solution. It may end up being a repository for bad loans.

Issues and Challenges of NARCL

  • Primarily owned by public sector banks: The biggest problem is that management and ownership of NARCL are held mainly by public sector banks. If the banks cannot quickly dispose of the bad debt, the NARCL will encounter similar results. The Public Sector Banks are both shareholders and customers, and it leads to the bad bank becoming a means to shift some bad debt from one place to another.
  • Price discovery: The rate that NARCL give the stressed loans from the banks might be challenging, even if the transaction involves the public sector banks as both buyer and seller.
  • The guarantee comes with a price: The government guarantee ensures an 18% minimum recovery, but the banks have to pay a fee to the government for it.
  • Uncertainty over the Response from the secondary market: Banks have the freedom to sell the security receipts. However, the extent to which a secondary market for such securities evolves is debatable.
  • Deterioration in asset value: Another issue is that the value of physical assets tends to diminish. It has been a recurring problem in the IBC process, where pressing the bankruptcy solution too late has meant little value left that will attract bidders. The NPAs that the NARCL handles are all old, legacy assets and might only have little residual value left.
  • No sunset clause: It is not clear whether the bad bank has an expiry date or whether it will exist forever as another option for banks. In most countries, the bad banks typically had a sunset clause and worked with a finite timeline in mind. The success of bad banks abroad has depended on speedy disposal instead of managing them until they got the best price.
  • The bad bank does not address the underlying cause of the bad loan problem in India: The reformation of the banking system in India, especially the public sector banks, can make the financial system more efficient. The underlying cause remains unaddressed by the latest reform. For these reasons, many economists, including the former RBI Governor, have opposed the establishment of Bad Bank in India.

Suggestions or Measures to improve the performance of NARCL

Realistic valuations: Banks usually recover only 10-15 paise to a rupee against their fully provisioned bad loans, which substantially reduces 85-90 percent. Banks must transfer bad loans to NARCL at realistic valuations that factor in such reductions.

Transparent process: There is a possibility of conflict of interest. Banks are the part-owners of both NARCL (51 per cent stake) and the asset management company (49 per cent), and they will also be sellers to NARCL. Therefore, the processes must be transparent and must employ independent market professionals to avoid conflicts.

Right talent and incentives: The success of the bad loan experiment will require a talented management team of IDRCL and the incentive structure for its employees. Suppose the best talent is taken up from the market and is offered liberal incentives for recovery of loans above 18 per cent. In that case, it could generate more than what the industry is estimating now.